The Option Investor Newsletter Sunday 01-07-2001 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/010701_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 1-5 WE 12-29 WE 12-22 WE 12-15 DOW 10662.01 -124.84 10786.85 +151.29 10635.56 +200.60 -277.95 Nasdaq 2407.65 - 62.87 2470.52 - 46.50 2517.02 -136.25 -264.16 S&P-100 681.71 - 4.74 686.45 + 2.22 684.23 - 5.25 - 37.58 S&P-500 1298.35 - 21.93 1320.28 + 14.33 1305.95 - 6.20 - 57.74 W5000 11872.50 -294.50 12167.00 +185.50 11981.50 -112.40 -572.60 RUT 463.14 - 20.39 483.53 + 20.54 462.99 + 4.96 - 21.04 TRAN 3113.99 +167.39 2946.60 + 96.67 2849.93 +151.25 -181.27 VIX 32.03 + 1.80 30.23 - 1.29 31.52 + .32 + 5.07 Put/Call .63 .67 .61 .94 ****************************************************************** Russia, Japan, Banks and the Fed, Have we been here before? By Jim Brown Just when traders felt it was safe to go back in the markets the investing climate took a serious hit. Beginning with a ghost from the past, Russia announced that it would not make the first quarter debt payment to a group of nations called the Paris Club which includes the United States. Russia said it was not a "declaration of default" but whatever you call it the results are the same. The debt is over $48 billion and the interest payment for the quarter is over $1.5 billion. This is not a material event in itself but raises questions about their future economic liquidity. They have defaulted on this debt twice in the past in 1991 and 1998. Another major pre-market problem was a rumor that Bank of America had suffered significant trading losses and/or material credit quality issues. The stock did not open for trading until 10:30 after BAC asked the exchange to halt the stock until they could put out a press release rebutting the rumors. They did issue the release saying things were fine and affirming estimates for the year but the damage had already been done. BAC dropped about -$5 but the impact to other financial stocks as investors fled in defense was more of a problem with Dow component JPM losing over -$3. Japan became a problem once again as the Yen lost ground closing at 116.56 Yen to the dollar. Investors in Japan have been pulling out of stocks with the Nikkei falling in tandem with the Nasdaq. Business bankruptcies, restructuring and slowing corporate spending are taking a toll on their fragile economic recovery. Analysts are worried that Japan is on the verge of another period of volatility with non-performing assets at banks mounting again. The Japanese central bank cannot rescue their economy like our Fed since interest rates are barely above zero already. Sounds like a great way to start a trading day! Is the Fed honeymoon over or are investors worried that the Fed knows something really scary that we don't? Many analysts were blaming Friday's drop on the worry that the Fed had reacted so quickly and drastically that there must be something on the horizon that we have not seen yet. With every new news event Friday they tried to point to it as a possible factor but there was no smoking gun. The Jobs Report was benign with only +105,000 new jobs and 4.0% unemployment. Analysts were expecting a real disaster after the unexpected rate cut and the benign report was a surprise. They then pointed to the energy problem in California and the rumor of BAC losing billions in trading energy derivatives as the hidden reason. When BAC denied the rumor and affirmed estimates that balloon burst. With no obvious scapegoat event, traders were looking behind every news article for the "hidden" reason. The Russian default, the weakening Japanese Yen, even the weakness in the Mexican economy and possible impact of a U.S. recession was mentioned. The bullish sentiment from Wednesday has evaporated and severe pessimism has returned. Give those boys and girls a tranquilizer, please! Yes, the Jobs report was benign on the surface. Only +105,000 new jobs but half (56K) of those jobs were government jobs leaving only +49,000 private sector jobs. Now factor in the 133,000 layoffs announced in December which have not yet taken effect and you have a good chance for negative job growth in January. The number of layoffs announced in December was an eight year high. The problem with the headline number was that it was just not bearish enough to justify the -.50% rate cut inter-meeting. However, it was still a market friendly report. The economy is still slowing and the manufacturing numbers show the sector to already be in a recession and getting worse AND fairly broad based. About the only strong points were financial services, transportation and utilities. The energy problem in California is now bleeding over into other states and impacting the market. Possible bankruptcies by the leading energy suppliers are putting pressure on banks which have loaned money to the utility companies. Huge layoffs have been announced in an effort to stop the bleeding. The rising energy costs and losses are expected to filter through the entire industry since many of these companies cover multiple states. Losses in California could be felt in higher rates in other states. Traders feel that the government relief in California was insufficient and will only delay the eventual bankruptcies of several huge energy companies and that is undermining the market. Many think this was a factor in Greenspan's decision. I think the problem is serious but I also think they are grasping at straws. I am more concerned with the huge outflows of cash from equity funds. With the expectation of a market bounce after the rate cut, and another cut almost a sure thing three weeks from now, why did $13 billion in cash flow out of stock funds in the week ended on Wednesday? I justify the number as Christmas bills, year end spending, taxes and the fact that the Nasdaq hit a new 52-week low on Wednesday morning. That low was before the rate cut and before any money transfer decisions could have been made as a result of the cut. Pessimism was very negative and investors were shuffling funds to start the new year. Sounds logical to me but it is my daydream. If you read my commentary on Thursday you know that I think the .50% rate cut was a message to Bush. I don't think it was related to any "hidden" disaster like the Long Term Capital problem or any global currency problem. Maybe the market drop on Friday was just the last gasp of the tax selling before the historical January rally start next week. I think if you take into account that tax selling, another flurry of a dozen or so earnings warnings, several high profile downgrades, the huge BAC rumor, the Russian debt default and the persistent CSCO earnings warning rumor you have a very good reason not to hold over the weekend. Traders simply decided that discretion was the better part of valor and they went home flat. Compared to Wednesday and Thursday the volume was positively wimpy. After turning in a two billion share day on Thursday the NYSE only managed 1.4 billion. The Nasdaq volume dropped by one third from 3 bil on Wednesday to barely 2 bil. on Friday. There was no huge rush to the exits. Down volume however did swamp up volume by 2:1 on the NYSE and 5:1 on the Nasdaq. That does concern me but at -250 on the Dow and -159 on the Nasdaq you would expect it to be lopsided. The earnings warnings are almost over but you could not tell from Friday. Delta warned that weather and pilots had forced the cancellation of 7500 flights and earnings would drop drastically. Tech stocks FCS, IOM, NXTV, CMTN and NEON all warned as well as GDT, MNY and BGP. BAC downgraded AMCC from a target of $160 to only $120 and AMCC lost -$10. Lehman downgraded SAPE, NXTV, AA and MMM saying Dow component MMM was fully valued. 3M lost -3.50. Robertson Stephens cut estimates on Wal-Mart but Prudential raised estimates. UBS Warburg and Goldman Sachs downgraded estimates for Hewlett Packard. CSFB cut IBI to hold from neutral and LTD to hold from buy. With only one week left in warnings season traders are hoping the big caps everybody has been dreading, IBM, CSCO, JDSU, etc, are not going to warn. IBM was actually up on Friday as investors breathe a little easier the closer we get to the actual earnings date. Investors in PVN and COF got hit with a downgrade from Morgan Stanley on fears that a hard landing would impact repayments and increase bankruptcies by credit card holders. Several analysts rushed to their defense pointing to their excellent track record during previous down turns. Both stocks lost but PVN took the biggest hit at -4.50. Much of the Nasdaq loss Friday was due to CSCO which lost -12% or -$5.25 on continued fear of a pending earnings warning. They announce a month later than most other companies, Feb-6th, so they are just now approaching their warnings period. The rumors were very specific that CSCO would warn after Friday's close. Since they didn't those rumors will probably shift into next week. It is doubtful they will go away. Pessimism to irrational exuberance and back to extreme pessimism in only three days. Dizzy yet? Got your motion sickness pills ready? While it would have been nice to believe the massive record setting rally on Wednesday was a result of millions of buyers rushing into the market on the news of the rate cut, it appears it was simply a mad panic by shorts covering after being blindsided by the Fed. Still, I believe it is immaterial. Over the last 12 years the first week of January has normally been flat or down. 1999 was the exception with the S&P rising +3.7%. In 2000 the S&P dropped -6% in the first four days before rebounding. The true test will come on Monday. Historically a rally day but we may be held hostage by speculation and worries about earnings. There are no material economic reports on Monday or Tuesday so the focus will be on news from the weekend and any earnings stories from next week. Wednesday we will see Wholesale Inventories, Thursday Import/Export prices and Friday the PPI and Retail Sales. Earnings will start to trickle out and hopefully a brighter outlook for the first quarter. Companies will be giving guidance for coming quarters and First Call is projecting only a +4% growth rate. If the guidance from the early announcers is higher then investors will start to feel more confident that a recession has been avoided. Conversely if the outlook is negative then the market may tend to trade down until the outlook improves. With a slow earnings week and dwindling warnings the hope will be for a bounce from the current oversold conditions on positive investor expectations. Any negative news that blunts this expectation could void a repeat of the week as a historical rally. The Dow has given back almost all the gains from the short covering rally on Wednesday and the Nasdaq has lost over half. The Nasdaq came to a screeching halt at 2400 in the last hour of trading on Friday. This is -235 points from Thursday's high and +156 points from Wednesdays low. Volatility anyone? At this point 2400 is only psychological and offers no real support. Still the Fed is on our side. Even if we retest 2300 again on Monday there is very strong sentiment that the 2300 area is the bottom and we should trade up from there. There are no guarantees in life but once the Fed starts cutting rates the market normally goes up. Mutual funds cannot make money by sitting on the sidelines and they will have to eventually buy stocks. Our task next week is to look for these buyers coming into the market on heavy volume and then join them. I am more cautious today than I was on Thursday night after only a minor drop on the Nasdaq of -2% following the +17% jump. The drop on Friday could have just been further profit taking prompted by all the negative factors I mentioned above BUT as traders we need to go with the trend not try to force our bias on the market. My bias may be up BUT until the market reverses to the upside I will lose money just like everyone else that buys too soon. The Fed gave us a present yet traders are treating it like a bomb squad would treat an unattended suitcase in an airport. Until somebody opens it and finds only a message to Bush the buyers may not come out of hiding. My suggestion is to wait patiently and see what the market gives us on Monday. Treat any rally as a trading rally and keep your stops close to avoid giving back your profits. Trade smart, enter passively, exit aggressively! Jim Brown Editor ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1291 ************************************************************** ************** EDITOR'S PLAYS ************** Lucky, not good. Sometimes you think everything has lined up just right and once you get all your positions open the bottom falls out. Other days a play that was an after thought doubles on no news. Until Wednesday the only luck I have had recently has been bad luck. To make a long story short, I bought the dip on Tuesday morning around 11:am when it looked like we bounced at 2325 on the Nasdaq. I watch the plays until after 1:PM and then left for some meetings out of the office. No, I did not place any stops because the market was moving up nicely. When I returned around the close the Nasdaq was back down to 2275 and looking grim. I considered closing all the plays for a loss in the last five minutes but just as I got my account up on the screen a green candle appeared on the Nasdaq. My bullish bias got the best of me and I held overnight. Lucky, not good! The gap down the next morning was followed immediately by an uptick so I was patting myself on the back for not closing. I left for meetings again confident that we were headed up. Wrong idea. The Nasdaq, as reported to me by my car radio, headed right back down to 2275 again. Cussing myself for not placing stops again I went into my 1:PM meeting depressed and fearing the worst. Eric, who was scheduled to write the wrap on Wednesday called me after the close and asked me if I wanted to write the wrap instead. I was confused as to why he would ask since he was on the schedule and said so. He told me about the rate cut and the big gains. I was as shocked as everyone but very happy that my luck had changed. Had I been in front of my PC I would have undoubtedly closed my positions when the Nasdaq rolled over Wednesday morning. That would have been an expensive decision. Lucky helps once in a great while! Because of the volatility of the markets I had purchased calls instead of my normal put selling strategy. Calls have less volatility than deep in the money puts. The puts have almost a 100% delta which means a $1 move in the stock creates a $1 move in the option price UP or DOWN. With the stock charts looking more like an EKG than a trend I did not want to get scared out with the huge intraday swings. The stocks I was long were: BRCM - JAN-90 Calls CIEN - JAN-70 Calls EMLX - JAN-80 Calls JNPR - JAN-110Calls QLGC - JAN-70 Calls SUNW - JAN-20 Calls ESRX - JAN-95 Calls The top six were big winners with some of the stocks up over +$20 on the Wednesday bounce. ESRX headed south at a high rate of speed with money fleeing the biotechs and drug stocks. I closed ESRX for a 50% loss on Thursday. I wish I had closed the others as well. Since I was up so much with most of them up almost 100%, I elected to watch and see if the Nasdaq was going to hold. It struggled all day but the individual stocks only slipped $4 or $5 by late afternoon and considering the gains on Wednesday I felt that was acceptable. My bullish bias was still clouding my vision. You already know what happened. It always happens this way. When stocks are not going up after 3:PM the alternative is not pretty. After 3:PM on Thursday the selling intensified slightly. This means I am down -$4 on a stock and at -$5 you think, "I will give it one more dollar then close." Now at -$6, "just one more dollar, there is only 20 min to close, we will probably get a bounce at the bell." This is the kiss of death and some of us never learn the lesson. So they all closed down -$5 or -$6 and well off the highs of the day. Still profitable but inaction has cost me plenty. Without even looking at a chart you know what happened on Friday morning. Jobs Report, Bank of America, CSCO, etc. Gap down and now half of my windfall profits from the Wednesday bounce are gone. Half, and we are talking a lot of money. Every time I fail to "sell too soon" it always comes back to bite me. Now, DO AS I SAY NOT AS I DO !! My game plan for next week is wait for a trend to develop. Sentiment is up for next week based on the historical trend but a CSCO warning could punch a hole in that very quickly. If we get a dip to 2300 with a bounce, I would buy the bounce. Many analysts are now saying 2200, 2100 and even 2000 as the next low point. It could easily happen with any negative news. The market is very scared and this wall of worry is proving difficult to climb. So, I plan on waiting for a sign. That sign could be a bounce from somewhere below 2400 or a rally above 2400 on strong volume. Either could signal a trading rally which I would buy. Notice I said "trading rally." Until we have a firm trend in place I plan on taking profits whenever available and simply waiting on the next entry point. It is safer and much less stressful. I plan on entering the exact same stocks as I played last week. I think they are the current leaders of the fast mover crowd. Until new leaders emerge they will be my picks. Good Luck, Trade smart, enter passively, exit aggressively! Jim Brown ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1281 ************************************************************** **************** MARKET SENTIMENT **************** That's It? By Austin Passamonte The long-awaited rally was a powerful one. Prices soared several hundred points in the major indexes straight up their charts. Only thing was, it happened within fifteen minute's time on Wednesday before anyone not holding long calls could react. Now what? Well, we sold off two straight sessions afterwards and it may not be over with yet. If a .50 basis-point cut before we expected and another .50 point cut factored as 98% probability by Fed-Fund futures for Jan 30th won't rally these markets, what will? Time. Time heals all wounds... even the cavernous pit we call 2001 quarterly earnings that stares us in the face. The abyss lies dead ahead with a few slippery trails off the side rumored to exist. Those trails are called JDSU and CSCO falls. A foul weather warning by either could plunge our packhorses straight down to places man hasn't seen in quite some time. Despite all fundamental news, technical analysis continues to prevail. While all pundits on Wednesday were certain the Dow was headed to new market highs, time proved it to hit impenetrable overhead on a classic double-top and now we see bearish divergence setting up again. 10,370 area could be a next stop on the way down. Guaranteed plunge? Not at all, but better than 50% odds in our opinion. That's all we can ask for as traders. The NASDAQ-100 always leads the COMPX and once again it's leading down. Failure at the 20-DMA (2512 red line) and reversing MACD tell us that 2,040 area is next stop for "firm" support. Guaranteed? No again, but it is the high-odds bet. This channel has held four-plus months and counting now, and it will take strong fundamentals to break out above resistance. Record volume that swamped the markets for two days served to cover shorts and rotate some sectors around. Should we consider Thursday & Friday mere profit taking? Boy, those sure were some awesome profits if that's the case! Remember the bubble of 1999? It partially driven due to companies posting solid earnings and later on the mere promise of earnings. Those days lie ahead of us again as well, but not this quarter and for many companies by their own confession, not at all in 2001. So where's the rush for investors to jump in? The VIX below 33.00 is no cause for contrarian glee just yet. It needs to go above 36.00 before screaming rally to us. Not that a rally cannot emerge on Monday because it could. Just don't see it in the cards from here. We full-well realize numerous diehard bulls shook off cobwebs Wednesday afternoon, fired up the computers and renewed their subscriptions to certain exceptional websites (!) all ready to buy calls on every symbol sporting four letters. Just like the old days. Unfortunately for them, any old days we see around here could be more like late 2000 rather than late 1999. Anything can certainly happen and that's why we play the game. However, there is always a likelihood. Always high-odds. In this case that seems to be testing recent lows once again. Trade the trend and manage your account wisely! ***** VIX Friday 01/05 close: 32.03 30-yr Bonds Friday 01/05 close: 5.44% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Saturday (01/06/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 720 - 705 11,575 4,602 2.52 700 - 685 9,901 8,272 1.20 OEX close: 681.71 Support: 675 - 660 3,135 8,204 2.62 655 - 640 200 8,678 43.39 Maximum calls: 700/5,473 Maximum puts : 640/5,395 Moving Averages 10 DMA 682 20 DMA 697 50 DMA 714 200 DMA 768 NASDAQ 100 Index (NDX/QQQ) Resistance: 66 - 64 74,288 25,203 2.95 63 - 61 54,311 38,324 1.42 60 - 58 71,173 48,658 1.46 QQQ(NDX)close: 56.62 Support: 55 - 53 10,799 24,135 2.23 52 - 50 6,210 22,048 3.55 49 - 47 3,883 11,896 3.06 Maximum calls: 60/63,379 Maximum puts : 60/37,699 Moving Averages 10 DMA 58 20 DMA 62 50 DMA 69 200 DMA 86 S&P 500 (SPX) Resistance: 1375 10,791 10,551 1.02 1350 40,538 33,441 1.21 1325 6,562 12,539 .52 SPX close: 1298.35 Support: 1275 413 12,468 30.19 1250 1,351 12,493 9.25 1225 129 13,941 108.07 Maximum calls: 1350/40,538 Maximum puts : 1350/33,441 Moving Averages 10 DMA 1307 20 DMA 1326 50 DMA 1355 200 DMA 1431 ***** CBOT Commitment Of Traders Report: Friday 01/05 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials DJIA futures (Current) (Previous) (Current) (Previous) Open Interest Net Value -2008 -818 -2167 -2589 Total Open interest % (-25.35%) (-12.51%) (-9.59%) (-11.60%) net-short net-short net-short net-short NASDAQ 100 Open Interest Net Value -1028 +1428 -1825 -2569 Total Open Interest % (-4.77%) (+8.65%) (-3.45%) (-4.43%) net-short net-long net-short net-short S&P 500 Open Interest Net Value +59586 +67807 -81851 -85776 Total Open Interest % (+29.89%) (+38.16%) (-11.09%) (-11.94%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: The Commercials show a minimal decrease in their net- short positions on the DJIA, NASDAQ 100, and the S&P 500 Small Specs show a dramatic increase their net-short positions on the DJIA. Interest Rates: Commercials are still moderately short T-Bond and T-Note futures. (Bearish) Currencies: Commercials heavily short Euro futures while small specs build net long. Small specs are betting on interest rate reduction while commercials remain skeptical. (Bearish) Energies: Commercials are net-short all oil products. These producers are hedgers and almost always take the opposite side of expected market action to lock-in production prices. (Bullish) Metals: Commercials are moving from net-long towards neutral in Gold, could be under distribution. Silver, Copper and Platinum are net-short. (Mixed to Bearish) Data compiled as of Tuesday 12/26 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://members.OptionInvestor.com/marketposture/010701_1.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1312 ************************************************************ *************** ASK THE ANALYST *************** Times Are Tough By Eric Utley Doc Greenspan's surprise last week was welcomed. But the subsequent sell-off in the major market averages reinforced just how difficult this tape is to trade. Now we know for a fact that the Fed is on the attack and interest rates are coming down. And that's why I maintain that our readers should stick with what's been working in the forms of financials, retailers and cyclicals. That is, our readers who only trade/invest from the long side. I'll continue to pound the table on the aforementioned groups of stocks for the next six months as they are likely to outperform. What we don't know is how the tech sector (Nasdaq) is going to receive the upcoming rate cuts. There's a heated debate taking place in the market about how long the looming rate cuts will take to filter into the tech sector. And as long as that debate takes place, tech will be a difficult area to game. Nonetheless, I have included several charts in this weekend's column of tech stocks that may or may not have reached the bottom and may be good long-term investments - the operative words are investment and long-term. Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Lookin' For The Bottom With Bull Call Spreads I really enjoy your Ask the Analyst Column. Following this newsletter in 1999 and early 2000, I ran my six digit account into seven digit. Hats-off to your service! I'm a full time speculator now. For past eight months, I've been reluctant to trade with all my capital. I've started to enter bull call spreads on NOK, GLW, TXN, ADI, WCOM and BBY using their Jan 2003 leaps. Please review these names and comment if these names will likely outperform the next bull market. Also, please name a few likely winners that I may consider entering in this clearance sale in tech stocks. Thanks in advance. - Sanjay The loyal readers of this column had the pleasure of reading about Sanjay's successful endeavors into the stock market in last week's Ask the Analyst. If you didn't get a chance to read it, I highly suggest reviewing last week's column for its motivational tone, if nothing else. After writing of Sanjay's successes last week, I promised to cover some of his bull call spread candidates and their likelihood of outperforming in the next bull market. So let us get to work! For readers familiar with bull call spreads, you may want to skip the following description and pickup below the CBOE link. But for those readers new to options, let's quickly define a bull call spread. A bull call spread, like the name suggests, is a bullish options strategy. The spread is completed by purchasing a lower strike call while simultaneously selling a higher strike call on the same underlying security and typically in the same month of expiration - there are many variations to this strategy by way of volatility and ratios among other adjustments. The risk of the bull call spread is the debit for the lower strike call purchased minus the credit from the higher strike call sold. The potential profit from this strategy is the difference between strike prices minus the debit paid. Here's an example where a trader might be bullish on shares of Cisco Systems and expect the stock to advance above $50 by July 2001: BUY CALL JUL-45 @ $5.13 SELL CALL JUL-50 @ $3.25 The capital outlay (risk) is $5.13 - $3.25 or $1.88 - that's the most the trader could lose. While the potential profit, if CSCO trades above $50 by July expiration, is the difference in strike prices (50 - 45 = 5) minus the total debit of $1.88 or $3.13. In short, the risk is $1.88 while the potential reward is $3.13 - remember that shares of Cisco HAVE to settle above $50 by July expiration in order to reap the $3.13 profit. For more information on options strategies, readers may want to check out the CBOE's option education center at the following link: http://www.cboe.com/education/ Now let us get back to Sanjay's requests. The majority of Sanjay's request are tech stocks and I still maintain that tech is a dicey place to put money to work over the next six to nine months. But with a time horizon out to 2003, the risk profile does change with names such as Nokia, Corning and Texas Instruments. So let's take a look at some those names and their charts. Nokia - NOK Shares of Nokia traced a massive inverse head-and-shoulders over the course of last fall, which is a technical pattern that is indicative of a bottom. The stock is now consolidating between the $40 and $45 levels, but just can't seem to get above the latter. And I think NOK's inability to get above the $45 resistance level stems from the sluggish tech sector - the Nasdaq is holding it back. The big spike up on the chart in early December was a result of Nokia's bullish comments regarding an up-tick in the handset business, which is the bread and butter of Nokia. I think Nokia's comments of the handset business improving was a very bullish development for its shares and should help to boost them higher once the broader tech sector truly regains its footing. And, to reiterate, I don't think that will happen for at least another six months. But looking out two or three years, I would suspect Nokia to outperform the broader market once institutional investors return to tech. Nokia is the leader in the handset space and that market is still growing. My girlfriend, Sadie, gave me a Web-enabled cell phone for Christmas and I love it and can't imagine being without one now! Corning - GLW The readers of this column should know, by now, that I love the fiber optic sector looking out four or five years. At the risk of boring our readers, I must reiterate that the optical network is a long way off from being completed. And as the premier optical cable provider, I would think Corning has many bright years ahead of it. For that reason, I would expect shares of Corning to outperform during the next bull market in tech stocks. But to reiterate my stance on tech, it's still dicey and shares of Corning reflect my view. The stock was a momentum fund manager's dream for nearly two years but that mo-mo buying created excesses in Corning's share price and, I think, those excesses have not yet been removed. Just look at the miserable downtrend on Corning's chart. I would like to write that shares of Corning have hit bottom at the $50 level, but I just don't think that's the case. In fact, I wouldn't be surprised to see the stock visit $40, which is a significant historical support level. You'll notice on Corning's chart that the stock really hasn't spent a significant amount of time basing at a support level. Last fall, it looked like GLW may had finally based at the $60 support level, but that support gave way in mid-December and now it looks like $50 is the key level. Instead of trying to pick the very bottom, I think it is more prudent to wait, and wait, for a base to build such as the ones in shares of Nokia and even Texas Instruments, which we'll review next. It takes a lot of time to build a base from which to rally and shares of Corning have not spent very much time basing at the $50 level. Texas Instruments - TXN Texas Instruments (TI) is obviously tied to the cycles in the semiconductor sector. And as we all know, the chip business has been contracting for quite some time. But unlike shares of Corning, shares of TI have been consolidating around a historical support level for three months now. The stock has been trading in a ten point range between support at $40 and resistance at $50. This basing pattern may portend a stabilization in the chip sector and ultimately an up-tick in the semi business in the coming months. My only concern with shares of TI and the broader chip sector right here is that we've only witnessed a temporary consolidation and protracted short covering. I went back on a historical chart to 1995 - the last major downturn in the chip sector - and noticed that shares of TI sold-off in a big wave, consolidated for four months, then sold-off again to lower lows. So with TI, and its crosscurrents, I would think it prudent to wait for a significant up-tick in the semi sector, which can be measured by the SOX.X. Best Buy - BBY Of all of Sanjay's requests, my favorite, in the near-term, is Best Buy. I've never visited a Best Buy store, so to be quite frank, I don't know a lot about the company. Of course I know they are an electronics retailer and that is the operative idea here - they're a retailer. And retailers work in a friendlier interest rate environment. There may be better opportunities in the retail sector than Best Buy, but for no other reason than the friendly Fed, I would expect its shares and its sector to outperform over the next six to nine months. But the key here with the retailers and other interest rate sensitive sectors is to wait for pullbacks to gain entry into long positions as they have already advanced substantially over the last month, or so. And although I preached consolidation around support levels (with time) for the above reviews, I do think a V-bottom is a possibility for shares of Best Buy in light of the lower interest rates ahead. ---------------------------- Portal Software - PRSF Would appreciate your opinion on PRSF. Thanks for your great job. - Igor Thank you for the compliment, Igor. Portal Software provides services, such as billing and customer management, to telecom companies. And the telecom business has been the pits. The reduction in capital spending by major telecoms was evident in Portal's last quarterly report in late November. The firm actually beat its EPS estimates but fell short of the revenue number. The company reported revenues of $72 million, but had guided analysts to expect $80 million. That sales shortfall caused a precipitous sell-off in its shares along with serious technical and psychological damage. If you're long shares of Portal, Igor, I wish I had something better to write, but I don't. The telecom business is still dicey and that will directly impact Portal's sales going forward. And its chart doesn't look good from any perspective. ---------------------------- Analog Devices - ADI, Motorola - MOT I just like to say thank you so much for your great stock evaluations over the past year. Although, I am down substantially since last year, I am looking into 2001 but being more selective about my stocks. ADI seems to have had a great 3rd quarter earnings and has still been hurt somewhat by market this year. ADI seems to be trading into a more and more narrow trading range between $45-$65 but looks poised for a breakout in the next week or two. Also there are a few small gaps around $70 and $77. Should we just ignore these gaps since it was so long ago, or use them to help establish support and resistance levels. Do gaps like these usually get filled - like in the case of the Nasdaq, gaps ALWAYS seem to get filled. - Sincerely, Brian Thanks for taking the time and effort in writing in, Brian! Shares of Analog Devices have been hurt in recent months and that has everything to do with the downturn in the chip sector and the market's perception of future earnings. Although ADI reported a solid quarter last time around, the market is looking forward and concerned the company won't be able to sustain its historical earnings record. I also see your observation of a narrowing trading range, Brian. And ADI's narrowing trading is somewhat interesting at this juncture as related to my ideas in Texas Instruments, which I reviewed above. If the shorts are merely bringing in stock in the chip sector right now, it makes sense that ADI hasn't fallen below its near-term lows, yet has been unable to break above its descending trend line. Judging by many individual charts in the chip sector, I would speculate that we're at a critical juncture in that group, where lower prices may be in store or, on the other hand, the bottom may have been reached and these stocks are ready to breakout above their descending trend lines. As for ADI's gaps around $70 and $77, I think they're inconsequential at this point in the trend. But that's just my opinion. MOT seems the worst is over for this stock. Last month the earnings warning did almost nothing to the stock. The stock just traded under $16 (down $2) briefly, then has since been in a short-term positive trend line. Is this a good sign of a bottom - bad news is no longer hurting the stock price? Motorola is very diversified firm with dealings in handsets, pagers, network systems and semiconductors. And if the handset business continues to improve, as I suggested with the review in Nokia, shares of Motorola should trade higher in the next year or two. And as you alluded, Brian, Motorola warned last month and the stock actually has traded higher. That is a bullish sign! ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* For the week of January 8, 2000 Monday ====== Consumer Credit Nov Forecast: $8.0B Previous: $16.7B Tuesday ======= Richmond Fed Survey Dec Forecast: NA Previous: -2.0 Wednesday ========= Oil & Gas Inventories 5-Jan Forecast: NA Previous: 288.7MB Wholesale Inventories Nov Forecast: 0.30% Previous: 0.30% Thursday ======== Initial Claims 6-Jan Forecast: NA Previous: 375K Export Prices ex-ag. Dec Forecast: NA Previous: -0.10% Import Prices ex-oil Dec Forecast: NA Previous: -0.10% Friday ====== PPI Dec Forecast: 0.10% Previous: 0.10% Core PPI Dec Forecast: 0.10% Previous: 0.00% Retail Sales Dec Forecast: 0.00% Previous: -0.40% Retail Sales ex-auto Dec Forecast: 0.30% Previous: 0.20% ECRI Wkly Index 5-Jan Forecast: NA Previous: 5.3% Week of January 15th ==================== Jan 16 Business Inventories Jan 17 CPI Jan 17 Core CPI Jan 17 Industrial Production Jan 17 Capacity Utilization Jan 18 Initial Claims Jan 18 Housing Starts Jan 18 Building Permits Jan 18 Philadelphia Fed Jan 19 Trade Balance Jan 19 Mich Sentiment-Prel. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1319 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Sunday 01-07-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/010701_2.asp ************** TRADERS CORNER ************** New Year's Resolutions: Collar Your Stocks By Lynda Schuepp Just before Christmas I told you about two of the stocks from my Christmas List- they are SEBL and ITWO. I bought ITWO for $45, sold January 50 calls for $7.38 and bought SEBL for $61 and sold the 70 calls for $9. A lot of people think that the covered call strategy is conservative and quite boring. I'll tell you what fun I had and a refinement to the strategy that I should have done. ITWO and SEBL are very volatile stocks. My intent was to hold the stock until expiration and make a total of 30 points by getting called out of the stocks. My assumption was that the market had bottomed and we were going straight up from there. I really didn't expect quite as much fluctuation in the price as I saw. From the chart above, you can see that ITWO went from $45 (my entry) down to $39 on Tuesday, January 2nd. I thought this was a bottom so I bought back my calls at $4.63 for a $2.75 profit. The SEBL chart looks quite similar and I did even better on those. I bought back those calls for $3.63 or a $5.38 profit. I look like a genius but I was really stupid here. I now owned the stock with no hedge and was exposed to any downside. This was particularly dumb for me, because I was not planning on being around the following morning. The next morning, which I missed, THANK GOD, ITWO dropped to a low of $36.80 and SEBL dropped to $49.75. Had I been around, I would have been cursing my stupidity and changing my original plan and also taking a big loss. The market turned around after the cut in interest rates. Thank you Alan. ITWO closed at 48.5 and SEBL went to $69.80 by the end of day. I've said this before, but sometimes it's better to be lucky than smart. The next day, I had to pay homage to the market gods. When the market did not follow through, I decided to sell the stocks and take a profit. I sold ITWO for $47.88 and SEBL for $68.38. I made a total of 12.75 points on the stock and the calls. That translates to a 17% profit in 2 weeks. My original plan would have netted me a maximum profit of 30 points in four weeks, if all had gone according to plan. Now for the lesson. What I should have done is collared my stocks. A collar is a short call and a long put. The goal is for the short call to pay for the long put. The long put is nothing other than a protective put and the short call is simply a covered call. As you all know I like to leg into positions. The opportunity that I missed was a big one but it taught me a lesson is risk management. Let's just look at SEBL. ITWO would have produced similar results. I bought SEBL for $61 and sold the 70 calls for 9 points shortly after the stock rose to $65. This move brought my break-even down to $54 and my maximum profit would be 18 points. (Read my last article if you don't understand how to get to these numbers). With the stock at $65, I could have purchased a put to protect my stock in the event that the stock tanked. The put is an insurance policy so you don't need to buy more than you need. Since I bought the stock at $61 I looked at the 60 strike on the put, which at the time was selling for about 3 points. A review of the new risk/reward numbers is in order here. I had received 9 points for the call and could have paid 3 points for the put. My maximum profit, if SEBL have closed about $70 at expiration, would have been 15 points. However, look at the protection to the downside. My original position would have been underwater by a couple of points when SEBL opened at $51.40 on Wednesday and dropped to $49.75 before turning back around. Gap downs are usually filled so when the stock filled the gap and headed higher, I probably would have sold my put and bought back my call (had I been around). The put would have been worth at least 10 points (strike of 60 less current price of stock at 50). The short call would have been worth approximate 3 points. In this scenario, I would have made 10 points on the put (which only cost me 3 points) and 6 points on the call that I bought back. The stock however would be 11 points under water but you would still be up 5 points on this strategy. Not bad for a stock that dropped 11 points since your entry. You should note that you would only sell the put AND buy back the call if you were extremely bullish at this point. The safer play would have been to buy back the short call and to hold on to the put for protection. If the stock continued to drop you would be protected dollar for dollar with the put and you would already have made 6 points from buying back the call! Had you held on to the put until your stock got back up to the entry price, the put would still be worth about 6 points. At that point you could sell the put and the stock, or sell the put and hold on to the stock and play this scenario out again. What is important to understand is that you could have totally protected yourself and made a very handsome profit if the stock went up or the stock went down. It's kind of like heads you win AND tails you win. Let's look at this strategy if you simply held until expiration. We'll look at 3 scenarios at expiration: the stock closes at $55, $65 and $75. Summary of Important numbers: Stock purchased at $61 60 put bought for $3 70 call sold for $9 At $55, the 70 call option would expire worthless and you would get to keep the 9 points. The stock, if sold, would result in a 6 point loss. The put could be sold for 5 points. Total gain = 8 points. At $65, the 70 call option would expire worthless and you would get to keep the 9 points. The stock, if sold, would result in a 4 point gain. The put would expire worthless. Total gain = 13 points. At $75, the 70 call option would be exercised and you would have to sell your stock for 70 for a 9 point profit. You received 9 points for the call but the put would expire worthless. Total gain = 18 points. As it turns out, your profit would never be less than 8 points, and your maximum profit would be 18 points, the same as just selling the call. Which would you rather have? I really missed the boat on this one, so I wrote about it to help others. Please protect yourself as much as possible in this market environment. Don't try to make up last year's losses all on one trade. Wipe the chalkboard clean, start over and build that portfolio back up, one good trade at a time. Know your risk/reward scenarios, before you put on the trade and write down what you will do if the trade goes well but also write down what you will do if the trade goes bad and follow your plan. That's the only hard part and that's my New Year's resolution. It's probably harder than losing 10 pounds. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1292 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* MER - Merrill Lynch & Co., Inc. $71.56 (+3.38 last week) See details in sector list Put Play of the Day: ******************** CELG - Celgene Corpation $24.69 (-7.81 last week) See details in sector list *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1313 ************************************************************ ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS HRB $40.56 (-0.81) We were encouraged by HRB's big run-up to the $44 level two Fridays ago and thought that it might lead to higher prices in the New Year. As it turns out, HRB pulled back from that level and has since consolidated around the 10-dma - a site of support since early December. That 10-dma may continue to prop HRB higher in the coming weeks, but for the time being, we're dropping coverage on the play in search of better opportunities. Open positions could be exited on a lift to the $41 level early next week. If you choose to hold any positions, make sure HRB continues to trade above its 10-dma which currently sits at $39.75. CIEN $74.00 (-7.25) While volatility was what we were looking for in our new play on CIEN, we got a bit more of it than we bargained for on Friday. Falling right from the open, CIEN never even gave us a hint of an entry point as it fell through our stop at $75, ending the week very near the low of the day. Even the surprise rate cut Thursday night wasn't enough to prop up stock prices, and then CIEN's 200-dma was too much to overcome, making for a quickly broken play. You can't win them all, and this is why we provide specific entry strategies. Following them kept us out of a play that wasn't quite ready to be served. PUTS AZA $38.31 (-4.19) We timed our entry into this short play fairly well early last week, ahead of the Fed's interest rate cut on Wednesday. The friendly Fed news spurred a flight of capital from the defensive names and into the growth areas of the market. That shift sent AZA lower, but the very same sector rotation boosted the stock in Friday's session. As the broader market averages sank, investors positioned back into the defensive names, which gave a lift to AZA. We fear this defensive buying may continue and, as a result, are dropping coverage on AZA this weekend. Use any weakness early next week to exit existing positions. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** UBS - UBS Warburg $173.91 (+10.51 last week) UBS Warburg is a business group of UBS AG, one of the largest financial services firms in the world with 78,000 employees in more than 40 countries. In the United States, UBS Warburg's securities activities are conducted through UBS Warburg LLC and PaineWebber Incorporated, U.S.-registered broker-dealers. The firm is a leader in equities, corporate finance, M&A advisory and financing, financial structuring, fixed income issuance and trading, foreign exchange, derivatives and risk management. UBS Warburg also offers a full range of innovative wealth management servicesthrough PaineWebber, and provides private equity financing through UBS Capital. Ever since bouncing off support at $120 in mid-October, shares of Swiss financial banking giant UBS have maintained a sustained advance. Trading in a range between $135 and $145 in the month of November, the stock broke out of that channel in December, as expectations of cuts in interest rates attracted buyers of Financial issues. When expectation became reality on Wednesday and the Fed came through with a 50 basis point ease in borrowing costs, the stock rallied, as traders rushed into the Financial sector on volume. So strong is UBS' upward momentum that it managed to gain $2.96 or 1.73 percent on Friday, despite weakness in the market. At this point, the stock has created a gap between $165 and $170, which it could likely fill in the near term. This would allow traders to enter on a dip on a test of support at $165. There is also moving average support from the 5 and 10-dma, currently at $166.64 and $162.89 respectively. For downside protection, we are placing a protective stop $165 level, as a close below this point would suggest a possible break in its current ascent. Inexpensive call options despite a high stock price makes this an attractive way to play the Financial sector, offering a high degree of leverage. Nonetheless, entry points are important so confirm bounces and breakouts with volume and make sure that sector sympathy is on your side before initiating a play, using movement in competitors such as BSC, LEH, MWD for guidance. ***January contracts expire in two weeks*** BUY CALL JAN-165 UBS-AM OI=66 at $10.20 SL=7.00 BUY CALL JAN-170*UBS-AN OI=20 at $ 6.60 SL=4.50 BUY CALL JAN-175 UBS-AO OI= 0 at $ 3.80 SL=2.50 Wait for OI!! BUY CALL FEB-170 UBS-BN OI= 0 at $ 9.80 SL=7.00 Wait for OI!! BUY CALL FEB-175 UBS-BO OI=50 at $ 7.10 SL=5.00 http://www.premierinvestor.com/oi/profile.asp?ticker=UBS CTXS - Citrix Systems Inc $26.69 (+4.19 last week) Citrix provides application server products and technologies that allows networked computers to run Windows-based programs from a central server, which gives their clients effective and efficient management of their applications. Its WinFrame software is used by well-known companies such as Sears Tire Centers and Hewlett-Packard Europe. Once CTXS fell from investors' grace last summer as the result of MSFT's turmoil, the share price has failed to fully recover from the devastation. However, the high-volume move to the upside of $25 last week offers some optimism of a revival. The subsequent break through the 30-dma, near $26, and the undaunted challenge of the immediate resistance at $28 provides further technical evidence of an impending breakout. We're anticipating the overall rotation into selective techs may carry CTXS higher next week. Assuming our speculation is on the money, so to speak, you'll need to be quick and disciplined. The company is reporting earnings on January 17th, after the market; OI will exit prior to the announcement to avoid any "sell on the news" incident. Consider the more conservative approach and look for viable entries as CTXS rallies through the pivotal $30 level in an advancing market. Of course, the less risk-adverse might find lower entries near the $25 and $26 levels during intraday dips. But be very cautious of taking positions near our $23 stop, this type of entry poses great risk; especially when you consider the erratic behavior of the technology stocks and in particular, the fickle bias towards many software stocks like MSFT, AGIL, and BEAS. Nonetheless, were optimistic of a short- term run up. UBS Warburg recently upgraded the stock to a Buy from a Hold, which also bodes well going forward. ***January contracts expire in two weeks*** BUY CALL JAN-20 XSQ-AD OI=2118 at $7.13 SL=5.00 BUY CALL JAN-25*XSQ-AE OI=9691 at $3.13 SL=1.50 BUY CALL JAN-30 XSQ-AF OI=3085 at $1.06 SL=0.00 BUY CALL FEB-25 XSQ-BE OI=2814 at $4.50 SL=2.75 BUY CALL FEB-30 XSQ-BF OI=1785 at $2.44 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=CTXS AEOS - American Eagle Outfitters Inc $46.44 (+4.19 last week) American Eagle Outfitters is a specialty retailer of collegiate- style casual apparel, accessories and footwear aimed at men and women ages 16 to 34. The company's fashion line of relaxed clothing bears the American Eagle Outfitters and AE brand name and are sold exclusively in their mall-based stores. They currently operate over 550 stores in 47 states and Washington, DC. Investors launched AEOS to new 52-week highs as the retail stocks surged after the Fed cut rates on Wednesday. AEOS is currently poised to not only surpass Thursday's $51.25, but also to challenge the all-time record near $60. From a long-term perspective, the initial boost to the retail sector may not necessarily be enough to overcome last year's slowdown in consumer spending. Plus recent filings with the SEC indicate relatively heavy insider selling. However, our objective is to lock in short-term gains as AEOS relishes in the present glow of a positive outlook. Other clothing retailers who were top gainers included the Gap (GPS) and Talbots (TLB). In addition to a rallying sector, December's same-store sales numbers also gave AEOS a shot of adrenaline last week. The company announced a 11.8% increase in comparison to First Call's consensus expectation of 3.3%, and an increase for total sales of 45.1% to $231.8 mln. Not too shabby in a "slowing economy"! In regard to the specifics of this sector play, we have our protective stop set at relative support of $42. We're looking for intraday support to stabilize around the $46 level and present a firm launching pad for more conservative entry points next week. Historically, the $50 mark served as a formidable resistance line; therefore, a definitive move through this level would, of course, offer more conclusive confirmation that AEOS can make a charge for $60. ***January contracts expire in two weeks*** BUY CALL JAN-40 AQU-AH OI=333 at $7.25 SL=5.00 BUY CALL JAN-45*AQU-AI OI=320 at $3.63 SL=2.00 BUY CALL JAN-50 AQU-AJ OI= 81 at $1.50 SL=0.75 BUY CALL FEB-45 AQU-BI OI=221 at $6.13 SL=4.00 BUY CALL FEB-50 AQU-BJ OI=526 at $3.88 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?ticker=AEOS ************************ NEW LOW VOLATILITY CALLS ************************ ITW - Illinois Tool Works $63.25 (+3.63 last week) Illinois Tool Works is a $9.3 billion diversified manufacturer of highly engineered components and industrial systems. The company consists of more than 500 decentralized operations in 40 countries, and employs approximately 52,800 people. Illinois Tool Works formed a bullish wedge pattern for the last three months, with a low point at $51 on October 27, and strong resistance at $60.75, which was penetrated this week. Despite the fact that Illinois Tool Works issued an earnings warning for next year due to a slowing economy (who hasn't?) investors are discounting this factor, and looking ahead to the direct impact of the Federal Reserve's interest rate cuts on the cyclical stocks. ITW has been trying to penetrate its 200-dma for a year, and each time it poked through, it fell back. Last week, ITW burst through resistance at the 200-dma of $58.58, and the momentum was strong enough to break resistance at $62.88, which has been eluding ITW since May. ITW's action on Friday afternoon was particularly bullish, as the stock bounced off the 5-dma of $61 in the morning, and closed higher in a down market. A possible entry point would be a break though resistance of $64.47 on strong volume, which could lead ITW toward $67.50. Intraday support is found at $63, and $62, but set stops at $61. Pay attention to the cyclical and capital good sectors (XLY and IYC)for strength. ***January contracts expire in two weeks*** BUY CALL JAN-60 ITW-AL OI=508 at $4.00 SL=2.50 BUY CALL JAN-65 ITW-AM OI= 27 at $1.00 SL=0.00 High Risk!! BUY CALL FEB-60 ITW-BL OI=330 at $5.25 SL=3.25 BUY CALL FEB-65*ITW-BM OI= 44 at $2.38 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=ITW VC - Visteon Corp. $14.00 (+2.38 last week) Visteon Corp is a leading full supplier that delivers consumer driven technology solutions to automotive manufacturers worldwide and through multiple channels within the global automotive aftermarket. Visteon has a global delivery system of more than 130 technical, manufacturing, sales and service facilities located in 23 countries. It has 81,000 employees working in three business segments: Dynamics and Energy Conversion, Comfort, Communication and Safety, and Glass. Visteon hit a 52-week low of $9.75 on December 12, and rebounded to rest at support of $11.50 last week. The Fed's interest rate cut and excellent news released by the company, as well as a demonstration of new futuristic technologies at the 2001 Consumer Electronics Show this week, pushed VC up past the 50-dma of $13 to $14, which served as strong support on Friday. This week, Visteon showcased its futuristic vehicle at the Las Vegas Electronics show, which includes such features as biometric identification technology, deformation sensing, and voice technology, which enables drivers to operate various features while keeping their hands on the wheel. This demonstration sparked buying interest in Visteon, as Thursday's volume was more than double the average daily volume, and pushed VC up to $14.75. Visteon closed at a gap level from Dec 6, which had previously been unfilled. As long as Visteon stays above the 50-dma of $13, the stock should remain in bullish territory, and remain positioned to clear the next resistance levels of $14.44 and $15. A break over $14.44 on strong volume would be a good entry point, as well as the current level of $14. Set stops at $12. ***January contracts expire in two weeks*** BUY CALL JAN-10 VC-AB OI=146 at $4.25 SL=2.75 BUY CALL JAN-12.5 VC-AV OI= 63 at $1.75 SL=1.00 BUY CALL FEB-12.5*VC-BV OI= 51 at $2.13 SL=1.00 BUY CALL FEB-15 VC-BC OI= 11 at $0.81 SL=0.00 High Risk! http://www.premierinvestor.com/oi/profile.asp?ticker=VC PMTC - Parametric Technology $15.44 (+2.00 last week) Parametric Technology is a leading maker of mechanical computer-aided design, manufacturing, and engineering software. Its flagship Pro/ENGINEER 3-D modeling software has been used by organizations such as Motorola and NASA. PMTC is moving beyond its humble beginnings to embrace the Internet; Its Windchill Factor! software enables collaborative business processes - from design to supplier sourcing and production - all from the comfort of the Internet. The company's software solutions are complemented by the strength and experience of its global services organization, which provides training, consulting, support and e-commerce solutions to customers through its 200 offices around the world. After the carnage inflicted on the stock back in April of last year, shares of PMTC have been on a nice gradual recovery, and look poised to continue their winning ways. The spring selloff was due to an ugly earnings shortfall, but the past two quarters have both seen the company handily beat estimates, and increase their revenue growth rate. The company has had plenty of positive press in recent weeks (from a successful new product launch to a $6 million order from the U.S. Department of Energy), and looks poised to continue its recent earnings pattern when it releases its numbers on January 16th, before the opening bell. Volume has been on the rise recently, hitting double the ADV on Friday, and driving the price right through the upper Bollinger band at $15.25. If the stock's recent history repeats (which we think it will), PMTC should consolidate a bit before heading back up to challenge the now-expanding Bollinger band. Since this is a low volatility play, we have placed a tight stop at $14. Buying intraday dips to support near $14.50 looks like the best entry strategy. Just make sure that the buying volume is strong before jumping into the play. ***January contracts expire in two weeks*** BUY CALL JAN-15 PMQ-AC OI=15016 at $1.25 SL=0.50 BUY CALL FEB-15 PMQ-BC OI= 9034 at $2.00 SL=1.00 BUY CALL FEB-17.5*PMQ-BW OI= 614 at $0.88 SL=0.00 BUY CALL MAY-17.5 PMQ-EW OI= 371 at $2.13 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=PMTC PPG - PPG Industries Inc $48.00 (+1.69 last week) PPG Industries manufactures decorative and protective coatings, glass products, and also specialty chemicals. You may be familiar with their Lucite brand house paint or Olympic stains. Coatings for architectural, automotive, and industrial uses account for 50% of the company's revenue while the glass products represent nearly 30% of sales. PPG has over 110 manufacturing facilities in 22 countries and about 250 retail paint stores in the US. If you like to play pure and simple earnings' runs, then PPG should meet your criteria. After recovering from the shocking Fed action on Wednesday, PPG rose to the occasion with a flair. It experienced a clean technical breakout through the 5-dma line, at the $46 and $47 levels. The robust enthusiasm induced a strong open at $49 on Friday, with a quick peak at $49.19, before PPG settled in for another day of bullish trading. The issue demonstrated strength first above $47 and then, at the closing price of $48. The positive promotion from CSFB of a Strong Buy recommendation also fed into the growing momentum. Although the chemical industry is likely to be hurt by declining demand and higher energy prices, the short-term prospect of a run into earnings looks good. PPG is scheduled to announce BEFORE the opening bell on January 18th. Look for the converged 10 and 200 DMAs at the $45 level to buoy the issue on pullbacks. A weak close below $45 warrants a hasty exit from the play. Consider taking entries if PPG continues to successfully trade above $47 and rallies through the immediate resistance at $49. But remember, time is of the essence. Get in and out before the earnings' release. ***January contracts expire in two weeks*** BUY CALL JAN-40 PPG-AH OI= 97 at $8.38 SL=6.00 BUY CALL JAN-45*PPG-AI OI=396 at $3.75 SL=2.25 BUY CALL FEB-45 PPG-BI OI=144 at $4.50 SL=2.75 BUY CALL FEB-50 PPG-BJ OI=649 at $1.56 SL=0.75 BUY CALL FEB-55 PPG-BK OI= 0 at $1.50 SL=0.75 Wait for OI!! http://www.premierinvestor.com/oi/profile.asp?ticker=PPG TBL - The Timberland Co $70.50 (+3.63 last week) Timberland designs, manufactures, and markets casual footwear, apparel and accessories for men, women and children around the world. Their premium-quality products are engineered for functional performance, classic styling and lasting protection from the elements. It sells its products through high-end retailers as well as its own specialty stores and factory outlets. A raging retail sector propelled this apparel manufacturer to a higher level of trading; although, a significant breakout in late December preempted last week's pivotal move through $70. In a high-profile interview posted on the Wall Street Transcript, VP of Social Enterprise of Timberland, Ken Freitas, reviewed his firm and the sector's future outlook. His positive comments and confident views combined with a rising DOW saw TBL tip the scales at $71 on December 28th. A period of mild consolidation ensued in the $65 and $70 range; that is, until last Wednesday's rate-cut rally! The strong momentum drove TBL upward to an all-time high of $74. Friday's retest of the $65 support level confirmed the stock's ability to maintain the higher trading levels during times of market adversity - weakness under $65 clearly signals an exit. The strong close near the high of the day further added credence to TBL's overall strength going into next week. If you're interested in taking positions into this sector play, you could target shoot for an aggressive entry near the $65 support or buy into strength as TBL moves off the current level ($70). If you take the latter approach, make sure the buyers step in first. High-volume action above the $74 resistance provides even better confirmation that TBL is poised to stretch into unknown territory. It'll also be important to watch other stocks in the retail sector, which can provide traders with an overall feel of how the market is moving. Some good choices include the #1 retailer Walmart (WMT), American Eagle Outfitters (AEOS), and the Gap (GPS). ***January contracts expire in two weeks*** BUY CALL JAN-65 TBL-AM OI=1312 at $6.63 SL=4.50 BUY CALL JAN-70*TBL-AN OI=1273 at $3.25 SL-1.50 BUY CALL JAN-75 TBL-AO OI=1305 at $1.38 SL=0.75 BUY CALL FEB-70 TBL-BN OI= 263 at $6.13 SL=4.00 BUY CALL FEB-75 TBL-BO OI= 50 at $4.00 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?ticker=TBL ******************* NEW LONG-TERM CALLS ******************* GE - General Electric Company $47.31 (-2.63 last week) GE is a diversified services, technology and manufacturing company with a commitment to achieving customer success and worldwide leadership in each of its businesses. GE operates in more than 100 countries and employs nearly 340,000 people worldwide, including 197,000 in the United States. The Company traces its beginnings to Thomas A. Edison, who established Edison Electric Light Company in 1878. In 1892, a merger of Edison General Electric Company and Thomson-Houston Electric Company created General Electric Company. GE is the only company listed in the Dow Jones Industrial Index today that was also included in the original index in 1896. As a highly interest rate-sensitive stock, this play on GE is all about a friendly Fed and lower interest rates. With the likelihood of further interest rate cuts going forward, this should help GE's earnings, thereby helping its stock price. While the effects of the interest rate cuts will not be immediate, the impact of an improving fundamental environment over the long term should be highly positive, which is why we recommend call options that go out several months to capture the maximum upside potential of this play. Look for pullbacks to support at the 5-dma (now sitting at $47), $45 and our stop price at $43 as possible aggressive targets to shoot for, confirming bounces with buying volume. For an entry on strength, look for a break above the 10-dma at $47.75 with conviction. In both cases, wait for bullish action in the DOW before initiating a play. ***January contracts expire in two weeks*** BUY CALL JAN-45 GE-AI OI= 3964 at $3.25 SL=1.50 BUY CALL JAN-50 GE-AJ OI=44768 at $0.69 SL=0.00 BUY CALL FEB-45 GE-BI OI= 907 at $4.50 SL=2.75 BUY CALL FEB-50 GE-BJ OI= 4543 at $1.88 SL=1.00 BUY CALL JUN-50*GE-EG OI= 4072 at $4.50 SL=2.75 http://www.premierinvestor.com/oi/profile.asp?ticker=GE LU - Lucent Technologies $14.50 (+1.00 last week) Lucent was formed from the systems and technology units that were formerly a part of AT&T, including the research and development capabilities of Bell Laboratories. The company designs, develops and manufactures communications systems software and products, primarily for Telecom providers like AT&T. LU is also engaged in the sale of business communications systems and in the sale of microelectronic components for communications applications to manufacturers of communications systems and computers. The company recently spun off its enterprise networks business (Avaya) and plans to spin off its microelectronics unit (Agere Systems). Oh, how the mighty have fallen! Once considered a major competitor in the Telecom equipment/Networking space, LU has really fallen from grace in the past year. Of course, what do you expect after the company has issued 4 consecutive earnings warnings? So what is it doing on the call list, you ask? Well, given the recent management change, decreasing interest rates, and the depressed stock price (LU is down more than 80% from its 52-week high), we think all the bad news is now factored into the stock and it is poised to recover with the broader markets. The stock has been finding support between $12-13 for the past couple weeks, and it was encouraging to see buyers appear when the Telecom stocks got a little bump earlier this week due to the surprise rate cut. We've got time to be patient on this one, as it is unlikely to run away from us. Look for more consolidation between $13-14 to provide an attractive entry point, and jump in as the buyers return. Our stop is placed at $12, just below the 52-week low; if it is violated, it won't take long for us to eject LU from the playlist. BUY CALL FEB-15 ULU-BC OI=7328 at $1.94 SL=1.00 BUY CALL APR-15 ULU-DC OI=3481 at $2.94 SL=1.50 BUY CALL JUL-15*ULU-GC OI=1259 at $3.63 SL=2.00 http://www.premierinvestor.com/oi/profile.asp?ticker=LU ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1320 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 01-07-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/010701_3.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1293 ************************************************************** ****************** CURRENT CALL PLAYS ****************** NOK - Nokia $42.31 (-2.25 last week) Nokia is the world leader in mobile communications. Backed by its experience, innovation, user-friendliness and secure solutions, the company has become the leading supplier of mobile phones, and a leading supplier of mobile, fixed and IP networks. By adding mobility to the internet, Nokia creates new opportunities for companies, and further enriches the daily lives of people. Considering the widespread carnage found in the technology sector Friday, Nokia demonstrated its underlying technical strength once again. The low price of the week was $38.94 on Wednesday, before the surprise rate cut was announced. Nokia immediately bounced up to resistance at $45. Nokia hit $45.50 on Thursday, and closed just above $44. On Friday, Nokia held up in the morning, but succumbed to market weakness and rumors of various crises which plagued the market, however, it held above the critical support level of $41.63. Many analysts have expressed their opinions regarding the issue of capital spending on telecom, optical Internet and other technology related spending in this slowing economy, but most agree that wireless infrastructure is one area in which corporate spending will continue at a pace of 20-30% annually, driven by upgrades to existing digital networks. Carriers continue to invest in new wireless spectrum, and as one of the top 5 vendors in this growing market, Nokia has a strong 30% position. In addition, Nokia is one of the few technology stocks which stayed above its 200-dma during December. A simple way to play Nokia is to take bullish positions upon the stock's clearing the converged 200 and 50-dma of $43.53. After that level is cleared, Nokia has light resistance at $44, and stronger resistance at $45.00, and $45.50. Market conditions permitting, we should see Nokia clear these levels in the near future, and begin its next traverse to $50. Continue to watch the wireless telecom sector for strength, and keep stops at $40. ***January contracts expire in two weeks*** BUY CALL JAN-42.5*NZY-AV OI=32421 at $2.69 SL=1.50 BUY CALL JAN-45 NZY-AI OI=24731 at $1.69 SL=0.75 BUY CALL FEB-40 NZY-BH OI= 1219 at $5.88 SL=4.00 BUY CALL FEB-45 NZY-BI OI= 2265 at $3.50 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=NOK COST - Costco - $41.31 (+1.31 last week) Costco Wholesale Corporation operates membership warehouses based on the concept that offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories will provide high sales volumes and rapid inventory turnover. Costco's warehouses generally operate on a seven day, 68-hour week, and are open somewhat longer during the holiday season. Costco is still in a strong bullish trend, despite the overall market weakness seen on Friday. The low point of the week was the 10-dma of $39.31 on Wednesday morning, a level which Costco bounced from, even before the Fed's surprise rate cut decision was announced. This level is still above the tight trading range Costco was trapped in for six months, and above the 200-dma of $37.14, and the 50-dma of $35.68. On Thursday, Costco almost cleared strong resistance of $44.69, which has eluded Costco since February, but it was not to be. On Thursday, Costco reported that their sales in December rose 6% from last year's level, however, this had little short term impact on the stock's price. On Friday, Costco drifted down with the markets, but bounced off strong support of $40 in the late afternoon, to close at the 10- dma of $41.31. With some help from the markets, and the retail sector, (RLX.X) Costco should be able to clear strong resistance at $44.69, which will lead to the next resistance levels at $46 and $49. Volume is significantly higher on the up days. A good entry point could be a move above $44 on strong volume, or, for more aggressive traders, another bounce off $40. Continue to set stops at $34. ***January contracts expire in two weeks*** BUY CALL JAN-35 PRQ-AG OI=6770 at $6.75 SL=4.75 BUY CALL JAN-40*PRQ-AH OI=2705 at $2.63 SL=1.50 BUY CALL FEB-35 PRQ-BG OI= 107 at $7.50 SL=5.25 BUY CALL FEB-40 PRQ-BH OI= 238 at $3.88 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=COST MER - Merrill Lynch & Co., Inc. $71.56 (+3.38 last week) Merrill Lynch & Co., Inc. has a strong client focus with a goal to deliver superior returns to their shareholders. They are determined to create value for their clients by providing wisdom and high quality services that meet their needs. Merrill Lynch has a track record of delivering strong returns to their shareholders, and has aligned employee and shareholder interests through a high level of employee stock ownership. They are leveraging the global investments they have made to sustain profitable growth. When the Fed lowers interest rates, the first to benefit are the Financial stocks, which is why shares of MER have recently rallied, and now appear poised to take out its all-time high. Simply put, interest rates are the cost of borrowing money. For a financial company such as MER, the cost of borrowing money is the cost of doing business. Like any other business, when costs go down, net income goes up. And when earnings rise, the Price-Earnings equation dictates that the stock price should move higher to factor in the increase in profits. With the Fed fund futures predicting a series of interest rate cuts going forward, this should help MER's stock to advance. Now near its all-time high of $75, trading volume has increased greatly since the unexpected 50 basis point cut in interest rates, most of it to the upside. While the stock did experience some profit-taking on Friday, volume to the downside was light. As well, support at $70 held firmly. Look for another bounce off this level as a potential entry point for traders looking to buy on a dip. Pullbacks to support from the 5-dma at $70.45, $69, the 10-dma at $67.97 and the 50-dma at $65.50 are also other targets to shoot for, but be aware that we have placed a protective stop at the $68 level. A close below this point would be our signal to close out this play. For conservative traders, a break above $73 on volume, with positive direction confirmed by movement in peers GS and LEH, could be an opportunity to enter this play. ***January contracts expire in two weeks*** BUY CALL JAN-65 MER-AM OI=11282 at $7.75 SL=5.50 BUY CALL JAN-70*MER-AN OI=46685 at $3.88 SL=2.50 BUY CALL JAN-75 JMR-AO OI=10026 at $1.44 SL=0.75 BUY CALL FEB-70 MER-BN OI= 1038 at $6.25 SL=4.25 BUY CALL FEB-75 JMR-BO OI= 1011 at $3.75 SL=2.00 http://www.premierinvestor.net/oi/profile.asp?ticker=MER ONE - Bank One $38.75 (+2.13 last week) Headquartered in Chicago, Illinois, Bank One is the #4 bank in the U.S., (after Bank of America, Chase Manhattan, and Citigroup). ONE operates some 1800 banking offices in 14 mostly Midwestern and Southwestern states, providing domestic retail banking, finance and credit card services. Its other business activities, which span the U.S. and more than 10 other countries, include commercial, corporate, and institutional banking, as well as loan and leasing services, and investment, brokerage, and insurance services. Proving that the law of gravity has not been repealed, ONE followed the broader markets lower on Friday, as the stock pulled back from the upper Bollinger band. Call it profit taking, sector weakness or selling the news, we were pretty impressed by the fact that our play toed the line and held at $38, above the $36-37 support level. That's pretty good on a day when the DJIA gave up a whopping -250 points, and Financial stocks came under renewed selling pressure. The dominant factor in the Financial weakness was speculation that some major US commercial banks will face losses on bad loans to the struggling California utilities. While Bank of America (BAC) gave up more than 7% by midday (despite claims that the company knew of no derivative or other losses), ONE managed to keep its losses in check, only giving up 3% and firming above support as the afternoon drew to a close. Earnings are fast approaching, currently scheduled for January 17th, and anticipation of solid numbers could give us an upside bias over the next couple weeks. Wouldn't that be nice for a change? Look for renewed buying to come in near current levels as a trigger for new positions. Hopefully investors will have a more positive attitude about the 75 basis point drop in interest rates and will come back from the weekend in a buying mood. While more conservative players might want to wait to buy on strength, keep in mind that the upper Bollinger band will act as resistance. This makes good entries tough to manage. The more prudent course of action will be to buy the dips, so long as they don't violate our stop, which still rests at $35. ***January contracts expire in two weeks*** BUY CALL JAN-35 ONE-AG OI=12218 at $4.25 SL=2.50 BUY CALL JAN-37.5*ONE-AU OI= 8641 at $2.13 SL=1.00 BUY CALL JAN-40 ONE-AH OI=15311 at $0.81 SL=0.00 High Risk!! BUY CALL FEB-37.5 ONE-BU OI= 2944 at $3.13 SL=1.50 BUY CALL FEB-40 ONE-BH OI= 4548 at $1.81 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=ONE SBC - SBC Communications $50.00 (+2.25 last week) With 61 million phone lines in 13 states, SBC is the #2 local phone outfit in the United States. It's not just a local operation either, as the company has stakes in Telecom operations in 23 other countries around the world. The services and products that SBC offers vary by market, and include local exchange services, wireless communications, long distance services, Internet services, cable and wireless television services, security monitoring, telecommunications equipment, messaging, paging, and directory advertising and publishing. It seemed no sector was safe from the bears on Friday, with everything from Telecom to Financials to Biotechs feeling the pain. SBC went along with the Telecom sector, succumbing to profit taking to the tune of a 3% loss. It appears that the combination of historical resistance between $51-52 and the 30-dma ($51.75) was too much for the bulls in the midst of a market-wide session of profit taking. Closing near the low of the day is certainly not a Buy signal, but it was encouraging to see the decline halt above the $49 intraday support level and bounce (however weakly) on the 5-dma ($49.25). In the event of renewed selling, the 200-dma (which has crawled up to $47.25) should provide support and keep our $47 stop from being violated. Earnings are still 3 weeks away on January 25th, so don't look for that event to affect the stock at least for another week. Aggressive traders can target shoot any weakness early next week as long as it is followed by a volume-backed bounce above the 200-dma. More conservative traders will want to wait for SBC to trade through the $52 level before jumping into new positions. Don't forget to trade with the sector - confirm sector strength (AMEX:TTH) and buying pressure in competitors such as VZ and WCOM before initiating new positions. ***January contracts expire in two weeks*** BUY CALL JAN-45 SBC-AI OI= 4006 at $5.25 SL=3.25 BUY CALL JAN-50 SBC-AJ OI=10624 at $1.69 SL=1.00 BUY CALL FEB-50*SBC-BJ OI= 658 at $3.25 SL=1.75 BUY CALL FEB-55 SBC-BK OI= 856 at $1.31 SL=0.75 BUY CALL APR-50 SBC-DJ OI= 8282 at $4.88 SL=3.00 BUY CALL APR-55 SBC-DK OI=16032 at $2.88 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=SBC VZ - Verizon Communications Inc $54.56 (+4.44 last week) Verizon Communications is the largest wireless-telephone company in the US; although they have operations worldwide. They provide wireline voice and data services, wireless services, Internet services, and published directory information. In addition, the company provides network services such as business phone lines, data services, telecommunications equipment, and payphones for the federal government. Wednesday's record-breaking market environment and a renewed interest in selective telecoms lifted VZ through the pivotal $50 level. The high-volume gains extended into Thursday's session with near-term support firming at $53 and $54. This strong technical development, bolstered by the intersected 30 & 50 DMAs, offers encouragement that the momentum can sustain VZ amid any adversity within the sector or marketplace. Strong bounces off the current level offer reasonable entries into this play; while the more enterprising traders might find a lower entry near our $51 protective stop or on deep pullbacks, at the previous $50 resistance level. However you may choose to strategize entries and exits, keep an eye on the overall sector movement to forecast potential breakouts and pitfalls. Some stocks you may want to follow include AT&T (T), WorldCom (WCOM), and Britian's Vodaphone (VOD), which together with VZ has a venture partnership in Verizon Wireless. Currently in the news, Verizon Wireless leads the bids in an auction of wireless telephone licenses, with the highest bid on nine of the top 15 markets. Looking down the road a couple of weeks, the company's upcoming earnings' release may also offer some trading excitement. Verizon Communications is confirmed to report on February 1st, BEFORE the market. A clean break through the $55 level would offer more conclusive evidence that VZ can run strong into its earnings. ***January contracts expire in two weeks*** BUY CALL JAN-50 VZ-AJ OI=10248 at $5.13 SL=3.00 BUY CALL JAN-55*VZ-AK OI= 8965 at $1.63 SL=0.75 BUY CALL JAN-60 VZ-AL OI= 7945 at $0.13 SL=0.00 BUY CALL FEB-55 VZ-BK OI= 616 at $3.00 SL=1.50 BUY CALL FEB-60 VZ-BL OI= 576 at $1.31 SL=0.50 http://www.premierinvestor.net/oi/profile.asp?ticker=VZ *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1314 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 01-07-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/010701_4.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1294 ************************************************************** ************* NEW PUT PLAYS ************* CSC - Computer Sciences Corp. $57.56 -2.56 (1.31 this week) Computer Sciences Corporation, one of the world's leading consulting and IT services firms, helps clients in industry and government achieve strategic and operational results through the use of technology. The company's success is based on its culture of working collaboratively with clients to develop innovative technological strategies and solutions that address specific business challenges. Computer Sciences formed a classic double top pattern at $74 the last week in November, and the first week in December, and the stock has been in a serious down trend since that time. Once a high flyer capitalizing on the high corporate IT spending on Y2K computer upgrades, Computer Sciences is now suffering with the computer services sector, as analyst after analyst lowers spending projections on IT services for the coming year. Computer Sciences was unable to clear the 200- dma of $73.82 on December 12, and quickly fell below the 50-dma of $71.44 the following day. The drop which ensued was sharp and severe, and the chart for the last two weeks shows a stock which would need a serious boost in order to re establish a clear upward trend. The company released additional news this week about their purchase of Mynd Corporation, as well as the filing of a shelf registration for a $1 debt offering, which was not well received. After receiving the additional blow of two downgrades in one week, Computer Sciences fell below the 10-dma of $61, and the 5-dma of $60 today. The stock has a daily pattern of rolling over from resistance at $59.88, and $58.63, and a failed attempt to clear these levels could be a good entry point. Alternatively, traders can take positions at the current level, which is a 52-week low after checking for weakness in the computer services sector. Set stops at $62. ***January contracts expire in two weeks*** BUY PUT JAN-65 CSC-MM OI=4031 at $8.13 SL=6.00 BUY PUT JAN-60 CSC-ML OI=1139 at*$4.38 SL=2.50 BUY PUT FEB-65 CSC-NM OI= 6 at $9.38 SL=6.50 BUY PUT FEB-60 CSC-NL OI= 808 at $6.13 SL=4.00 http://www.premierinvestor.net/oi/profile.asp?ticker=CSC CB - Chubb Corporation $75.13 (-11.38 last week) Chubb Corporation, incorporated in June 1967, is a holding company with subsidiaries principally engaged in the property and casualty insurance business. The Company presently underwrites most forms of property and casualty insurance. The Company's Property and Casualty Insurance Group writes non-participating policies. Several members of the Property and Casualty Insurance Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders. Like most defensive issues, shares of CB had a stellar year in 2000, going almost straight up with on the back of its 100-dma, with any tests of that level providing traders with an ideal entry point. Connecting the highs and lows since March of last year reveals a upward-trending regression channel which up until this week, remained unbroken. With the break of this long-term uptrend, shareholders have been selling the stock, eager to take their profits and rotating their money into less defensive sectors. Recent analyst support has been lackluster at best, with Deutsche Banc Alex Brown initiating coverage of CB at a Market Perform and Wasserstein Perella starting the stock with a Hold rating. Lehman Brothers came in defense of CB, re-iterating an Outperform rating and a $96 price target but worries about valuation and questions of whether CB can deliver better-than-expected results going forward have made investors nervous. After heavy selling in the past couple of trading sessions, CB is now in oversold territory and a bounce is quite likely. Look for resistance at the 100-dma at $79.67 and the 5-dma at $80.78 as possible entry points but confirm a rollover with selling volume and make sure CB closes below out stop price of $80. When making a play, look for weakness in rivals CI and ALL to confirm direction. ***January contracts expire in two weeks*** BUY PUT JAN-80 CB-MP OI= 90 at $5.75 SL=4.75 BUY PUT JAN-75*CB-MO OI=114 at $2.69 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=CB PDLI - Protein Design Labs $59.50 (-27.38 last week) Protein Design Labs is a leader in the development of humanized monoclonal antibodies for the prevention and treatment of disease. They have licensed rights to their first humanized antibody product, Zenapax (daclizumab) to Hoffmann-La Roche Inc. and its affiliates, which markets it in the U.S., Europe and other countries for the prevention of kidney transplant rejection. They have seven other humanized antibodies in clinical development for autoimmune and inflammatory conditions, transplantation and cancer. With the Biotech sector being one of the few bright spots of a much-beleaguered NASDAQ, it seemed only a matter of time before the bears came to rain on the party. For the year 2000 the AMEX Biotech Index gained over 60 percent, faring much better than most other Tech sectors. But now, the concerns over valuation, lack of earnings and the drag of a slowing economy are finally hitting this space. In fact, volume to the downside has accelerated in the sector, as investors were eager to take profits and move them to other less richly valued and more interest-rate friendly sectors. While the stock has spent the past few months flirting with its 200-dma line, support at the $70 level appeared to be strong. That is, until Friday when continuing negative sentiment in the Biotech sector resulted in PDLI closing below that level, losing $14.50 or almost 20 percent on over three and a half times the ADV. At this point, a bounce from oversold conditions is quite possible, allowing traders to sell a failed rally. Resistance overhead can be found at $60 and our stop price of $66. There is also resistance at $70 but a close above our stop price could suggest a break in PDLI's downtrend so make sure the stock closes below this level when making a play. If selling continues to dominate on Monday, taking PDLI below Friday's low of $56.25, this could allow for an entry on weakness. When taking a position, make sure that sector sentiment is on your side by keeping an eye on Merrill Lynch's Biotech HOLDR (BBH). ***January contracts expire in two weeks*** BUY PUT JAN-65*PQI-MM OI=64 at $10.63 SL=7.50 BUY PUT JAN-60 PQI-ML OI= 0 at $ 7.13 SL=5.00 Wait for OI!! http://www.premierinvestor.net/oi/profile.asp?ticker=PDLI RIMM - Research In Motion Ltd. $47.50 (-32.50 last week) Based in Waterloo, Ontario, Canada, Research In Motion Limited is a leading designer, manufacturer and marketer of innovative wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, RIMM provides solutions for seamless access to time-sensitive information including email, messaging, Internet and intranet-based applications. RIMM technology also enables a broad array of third party developers and manufacturers in North America and around the world to enhance their products and services with wireless connectivity. Shares of RIMM have been getting more portable lately, as selling on increased volume has trimmed the stock of almost 70 percent of its value so far in the New Year. While the handheld computing device maker ended the year 2000 in positive territory, it appears that 2001 is proving to be a tougher time. Connecting the highs and lows since its October peak reveals a downward trending regression channel, and a wide one at that. Most recently, the downtrend has accelerated, so much so that even Wednesday's rally on the heels of a Fed rate cut could not allow RIMM to break above its 5 and 10-dma. A downgrade by H.C. Wainwright, from a Buy all the way down to a Sell rating, and an article in Barron's suggesting the sector as a hunting ground for short plays certainly added fuel to the fire sale. On Friday, the stock fell another $9.88 or 17.17 percent and in doing so, broke a key support level of $51.50. Now deeply in oversold territory, a bounce from current levels is very much possible, giving us an opportunity to enter this play, and time for the 5 and 10-dma to catch up with RIMM's stock price. At this point, resistance can be found overhead at $50, $51.50 and our stop price at $55. When buying a failed rally, confirm the rollover with volume and make sure that other stocks in the portable computing sector, HAND and PALM, are moving in the same direction. With RIMM being one of the larger cap stocks on the Toronto Stock Exchange (TSE), it could also be a good idea to keep a watch on that Index. ***January contracts expire in two weeks*** BUY PUT JAN-50*RUL-MJ OI=1032 at $9.00 SL=6.25 BUY PUT JAN-45 RUL-MI OI= 0 at $6.50 SL=4.50 Wait for OI!! http://www.premierinvestor.net/oi/profile.asp?ticker=RIMM CALP - Caliper Technologies $30.56 (-16.44 last week) CALP's LabChip microchips are like miniature science labs. The company has developed two types of LabChip systems, Personal Laboratory Systems and High Throughput Systems. Its personal laboratory systems use chips with reservoirs for the various chemical reagents, which the user introduces manually. CALP's high throughput systems perform experiments in a serial, continuous flow fashion at a rate of 5,000 to 10,000 experiments per channel per day. The high throughput Sipper chip is a unique system that uses capillaries to draw nanoliters of reagents into the channels of the chip. Caliper has development pacts with Agilent Technologies, which markets LabChip as part of a bioanalysis system, and with Millennium Pharmaceuticals. Providing the building picks and shovels to a growth industry is normally a recipe for success. The problem that exists with CALP is that it is providing the tools to the Biotechnology sector, which began rolling over in early November, and appears to be in danger of heading further south. For its own part, CALP has been in a downtrend since topping near $70 at the end of October. The $40 level had been providing support, but that got destroyed over the past 2 days as the stock has given up 33% of its value, plunging through the lower Bollinger band by more than $6 and putting the stock in dire need of a relief bounce. While it could head further south from here, the odds are against it, and we would advocate waiting for a bounce before initiating new positions. This is where it gets a little tricky, as we have placed a tight stop at $35 in case the bargain hunters come knocking next week. Use any bounce near our stop as an opportunity to enter the play at a better price or for those adventurous souls, consider stepping into the play as CALP falls below the $30 level and takes aim at its 52-week low of $22.50. Confirm weakness in the issue by watching the Biotech Index (BTK.X) and specifically other "picks and shovels" players, such as AFFX. ***January contracts expire in two weeks*** BUY PUT JAN-40 DQQ-MH OI=122 at $10.25 SL=7.25 BUY PUT JAN-35*DQQ-MG OI=118 at $ 5.88 SL=4.00 http://www.premierinvestor.net/oi/profile.asp?ticker=CALP IVX - IVAX Corp $31.00 (-7.30 last week) IVAX is a research and manufacturing company of proprietary and generic pharmaceuticals in the US and foreign markets. Currently, its generic products account for almost 60% of sales. The generic product line includes 57 prescription drugs, which are manufactured under the Zenith Goldline and Goldline brands, and about 350 other drugs and vitamins. Proprietary drugs include its cancer treatment Paxene, its Easi-Breathe asthma inhaler product and Elmiron, an innovative drug used for the treatment of interstitial cystitis. IVAX also produces neutraceutical products, veterinary drugs, and diagnostic reagents and instrumentation. The company is currently in the process of merging its diagnostics subsidiary with b2bstores.com, an office products and services provider. Lesser-known rivals of the major drug companies are the emerging generic drug makers such as IVAX Corp (IVX), Mylan Laboratories (MYL), Israel's Teva Pharmaceutical Industries (TEVA), and Andrx Group (ADRX). But unfortunately, their outlook may not be as rosy as everyone thinks. It's true that there's potentially over $8 bln in US sales open to generic applications from drugs losing patent protection; but there's also the likelihood of stiff competition from numerous copycat products - the first company to file with the FDA only gets an 180-day window of exclusivity! In other words, the opportunity for an earnings' windfall is slim to none. In despite of their questionable future, the smaller generic firms made significant advances in 2000. But at present, the bias is to the downside. IVX saw a critical breakdown last week. A distinct sell-off rang in the New Year and the $35 support level let-go by Wednesday. Gruntal & Co also came forward and reiterated a ST and LT Outperform, but it apparently didn't have any positive effect on trading. A sharp reversal to the 5 and 10 DMAs at $34.87 and $36.02, respectively, followed by heavy selling provide an aggressive opportunity to take entries into the current downtrend. Intraday gyrations may also offer a variety of entry points. Look for rollovers at our protective stop of $35 or buy into continued weakness below the $32 mark in a declining market. ***January contracts expire in two weeks*** BUY PUT JAN-40 IVX-MH OI=151 at $9.30 SL=6.25 BUY PUT JAN-35 IVX-MG OI=444 at $4.80 SL=3.00 BUY PUT JAN-30*IVX-MF OI=249 at $1.70 SL=0.75 http://www.premeirinvestor.com/oi/profile.asp?symbol=IVX ***************** CURRENT PUT PLAYS ***************** ARTG - Art Technology Group $17.94 (-12.63 last week) Art Technology Group offers an integrated suite of Internet customer relationship management and e-commerce software applications, as well as related application development, integration and support services. The Company's solution enables businesses to understand, manage and build online customer relationships and to market, sell and support products and services over the Internet more effectively. About 40% of sales are derived from Web site design, consulting, and other support services. Global clientele include Forbes and General Motors. Once a sector full of promise, the B2B space has been decimated by factors both fundamental and technical. Fundamentally, it's all about the earnings, or lack thereof. Even without a slowdown in capital spending, questions that could not be answered satisfactorily about the viability of the B2B business model were enough to result in the mass exodus of shareholders. While the idea of selling management software, creating marketplaces and generating royalties as an intermediary in transactions seemed lucrative in theory, in reality, fierce competition, the lack of interest in third-party marketplaces and the realization by companies that an electronic middleman was superfluous was all the bears needed to hit the sell button with force. It's no surprise that leaders such as ARBA, CMRC and ITWO are well off their all-time highs, but it's the second-tier issues such as ARTG which have been more deeply damaged. But don't underestimate its low stock price. Despite its low dollar value, the stock moves in a range of 4 points or more on any given day, making this a highly tradable play. Technically, the chart reveals a strong downtrend and if the stock price of peers ICGE and VERT are any indicated, then there is more downside to come. For aggressive traders, look for ARTG to roll over when approaching resistance at $19, 20 and our stop price at $21, confirming with selling volume before making a play. For a safer play, wait for a break below support at $17.50 on increased selling, confirming direction with Merrill Lynch's B2B HOLDR (BHH), before jumping in. ***January contracts expire in two weeks*** BUY PUT JAN-25 AYQ-ME OI=58 at $8.38 SL=6.00 BUY PUT JAN-22.5*AYQ-MX OI=12 at $6.63 SL=4.50 http://www.premierinvestor.net/oi/profile.asp?ticker=ARTG FRX - Forest Laboratories Inc. $117.25 (-15.63 last week) Forest Laboratories develops, manufactures and sells both branded and generic ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over the counter. Forest's most important United States products consist of branded ethical drug specialties marketed directly, or detailed, to physicians by Forest Pharmaceuticals, Forest Therapeutics and Forest Specialty Sales forces. Their products include Celexa, for the treatment of depression; the respiratory products Aerobid, Aerochamber and Tessalon; Tiazac, Forest's once-daily diltiazem for the treatment of hypertension and angina. Breaking an uptrend line that has been in place for over a year, shares of FRX has been selling off on increasing volume. Fundamental factors that helped the stock to rise in the year 2000 have now reversed, and with formidable resistance at $140, the technical picture looks weak as well. An unfriendly Fed resulting in an environment of rising interest rates last year along with Tech stocks falling out of favor drove traders to defensive stocks such as FRX. Bounces off the 50 and 100-dma were few and far in-between, with buyers support the stock on the rare times that it hit those levels. As mentioned earlier, resistance at $140 has been formidable, with many unsuccessful attempts to rally above this point in the past three months. And now, with the Fed on the side of traders, money has been rotating out of the Drug sector and finding its way into Financials, Cyclicals and some select Tech stocks. Breaking below the 100-dma (now at $120.25) this past Thursday, support has now become resistance as FRX failed to climb back above that level on Friday. Aggressive traders may look for a failed rally above 100-dma as an ideal entry point, making sure that the stock closes above our stop price of $120. For the more risk averse, look for a plunge below support at $115 on volume before making a play, confirming direction with Merrill Lynch's Pharmaceutical HOLDR (PPH). While the stock will be splitting 2-for-1 this coming Thursday, January 11th, negative momentum suggests that a pre-split run-up is unlikely. Nonetheless, exercise caution when trading as we approach this date. ***January contracts expire in two weeks*** BUY PUT JAN-120 FRX-MD OI=42 at $7.00 SL=5.00 BUY PUT JAN-115*FRX-MC OI=73 at $4.38 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=FRX P - Phillips Petroleum Co. $55.88 (-1.00 last week) Phillips Petroleum Company is headquartered in Bartlesville, Okla., where the company was founded in 1917. Phillips 66 - the company's trademark red and white shield - is recognized around the world as the trademark of a major energy company. An integrated oil company, the Phillips of today has worldwide operations. The company's core activities are: 1. Petroleum exploration and production on a worldwide scale; 2. Natural gas gathering, processing and marketing in the United States and Petroleum refining, marketing transportation, primarily in the United States; 3. Chemicals and plastics production and distribution worldwide. It's been a volatile couple of weeks for shares of Phillips Petroleum, as a rapidly changing fundamental environment has made this a volatile but tradable play. Having already broken its long-term uptrend line, one that has held since the beginning of the year 2000, Phillips has found that former level of support now acting as resistance. The Fed's surprise intra-meeting 50 basis point interest rate cut caused a traders of defensive issues, as they became a little braver with their money. Expectations of future rate cuts could help our play to head deeper into negative territory. Add to this a downgrade by Prudential Securities from a Strong Buy to a Hold rating, and formidable resistance from the 50-dma, and its no wonder that shares of P were moving lower. However, a rise in crude oil prices courtesy of news that OPEC would be cutting back on oil production gave the stock a temporary lift. Despite Friday's gain of $1 or 1.82 percent, volume was light and the weak finish suggests a rollover in the near future. For aggressive traders, resistance should be formidable at $56, thanks to the 5 and 10-dma, currently converged at that level. There is additional resistance from the 50-dma, now sitting at $58.15 but be aware that we have placed our protective stop at $57. For conservative traders, break below the key support level of $54.75, backed by strong selling volume, would provide for a safer play. As Phillips is in a heavily commodity-driven industry, correlate entries with the AMEX Oil Index (XOI) as well as with rivals TX and XOM. ***January contracts expire in two weeks*** BUY PUT JAN-60 P-ML OI=209 at $4.75 SL=2.75 BUY PUT JAN-55*P-MK OI=624 at $1.56 SL=0.75 http://www.premierinvestor.net/oi.profile.asp?ticker=P UNH - UnitedHealth Group Inc. $53.94 (-7.44 last week) UnitedHealthcare designs and operates health benefits systems with commercial, Medicare and Medicaid products. Today, the company serves approximately 8.6 million individual consumers as members of its health service systems. On behalf of these members, the company arranges access to care with more than 340,000 physicians and 3,500 hospitals across 44 U.S. markets and several international markets. UnitedHealthcare helps members achieve improved health and well-being by designing innovative, people-oriented health benefit plans and services that value individual choice and control in accessing health care. A change in the fundamental picture, combined with technical weakness has led to the recent addition of UNH as a put play. The Healthcare sector as a whole enjoyed a sort of Renaissance in the year 2000, helped by turning sentiment in Tech stocks, an environment of rising interest rates and expectations of strong growth for the industry, all helping to attract investors to defensive issues such as UNH. Over the past year, the stock had been in a solid uptrend, with brief visits to the 50-dma serving as a rare but welcome buying opportunity. But with questions of valuation now plaguing the Healthcare sector, easing interest rates and the suggestion by analysts that growth going forward may not be as brisk as in the past year, investors have been eager to take their profits, rotating the proceeds into more attractive areas. This has resulted dramatic declines this past week on accelerating volume. Since breaking its 50-dma on Wednesday, shares of UNH have fallen sharply lower on heavy selling volume, definitively breaking its long-term uptrend. The stock should encounter resistance overhead at $55, 5-dma at $56.92, the 50-dma at $58.93 and the 10-dma at $57.41. These levels could provide buy points for higher risk players entering on failed rallies, but note that we are placing a stop at the $60 level. For a more conservative entry, a break below the 100-dma ($53.02) with conviction would be an ideal point to take a position. In both cases, look for weakness in other stocks in the Healthcare sector such as AET and CI to confirm downward momentum before making a play. ***January contracts expire in two weeks*** BUY PUT JAN-55*UNH-MK OI= 976 at $3.13 SL=1.50 BUY PUT JAN-50 UNH-MJ OI=2666 at $1.13 SL=0.00 http://www.premierinvestor.net/oi/profile.asp?ticker=UNH CELG - Celgene Corpation $24.69 (-7.81 last week) Celgene specializes in immunotherapy medications, focusing on small-molecule compounds that suppress the body's overproduction of tumor necrosis factor alpha, which has been linked to several inflammatory diseases. Not one to shy away from the controversial, CELG makes leprosy treatment THALOMID (a form of thalidomide, which was blamed for thousands of birth defects when used as a sedative in Europe in the 1950s and 60s). The company is exploring the use of THALOMID for brain tumors and other cancers. CELG is also developing its own version of Ritalin, which is used to treat children with Attention Deficit Disorder. Although they held up rather well in the midst of the rampant technology selling over the past 9 months, Biotech stocks are once again coming under selling pressure. It looks like the bears have their eyes set on new 52-week lows for many of the sector's residents, and CELG may be one of the first to get there. After topping out in the vicinity of $70, the stock rolled over precipitously last month and unceremoniously sliced through the 200-dma (then at $52.94), which had been acting as support. That technical violation just opened the door for more carnage, and since then, the share price has been cut in half, tracing an intraday low of $23.63 on Friday. With earnings set to be released on January 25th, investors may be hoping for bit of a respite from the selling. Their optimism may be misplaced though; CELG has yet to actually show a profit and their revenue growth has been slowing over the past several quarters. This isn't a combination that puts investors in a buying mood, at least not in this market environment. Even the 2 interest rate reductions last week had no effect on the stock price, as it continued to drift lower, falling through the $30 support level. Volume has been very heavy, coming in at more than double the ADV in recent sessions, and a continuation of this pattern will provide a good confirming signal for the bears. Support becomes resistance, and we are looking for a relief rally to produce a rollover and new entry point near this level early next week. Although we are leaving a loose stop at $35, just in case the bounce takes out the $30 level, the technicals (Stochastics, MACD, and lower Bollinger band) are weak enough to allow the stock to drop as low as $17-18 before the bulls step back into the ring. Take what the markets give next week and open new positions accordingly; either on a rollover near the $30 or $34 resistance levels or on a drop through the $23 support level. In either case, confirm solid selling volume and a Biotech index (BTK.X) that is continuing to head south. ***January contracts expire in two weeks*** BUY PUT JAN-30 LQH-MF OI=192 at $6.88 SL=5.00 BUY PUT JAN-25*LQH-ME OI= 67 at $3.50 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=CELG TQNT - Triquint Semiconductor $42.00 (-1.69) A leading global supplier of a broad range of high performance integrated circuits, TQNT offers standard and customer specific products as well as foundry services. The company uses gallium arsenide (GaAs) instead of silicon as the substrate (base) for its analog, digital, and mixed-signal integrated circuits (ICs). GaAs ICs operate at greater speeds than silicon chips, or at the same speeds with less power consumption, making them ideal for all sorts of gadgets, such as cell phones, pagers, fiber-optic and satellite telecom equipment, and data networking devices. Playing with the big boys, its clientele includes Nortel, Alcatel, Ericsson, Lucent, and Raytheon. Valiantly attempting to do its part in resurrecting the Semiconductor sector (SOX.X), TQNT has spent much of the past 2 months clawing its way higher, as it posts a series of higher lows. The picture started looking cloudy in early December, when the stock began failing to put in corresponding higher highs. Significant resistance has begun to form near $49 (right where we have placed our stop), and this still looks like a great level for initiating new positions on a failed rally. The technicals are still looking weak, and a violation of the ascending trendline near $40 looks like it could occur as early as Monday or Tuesday. The CSFB downgrade from Buy to Hold in early December was the catalyst for shares to pull back from the $60 level, but last Wednesday's Buy rating from Wit SoundView had a far less pronounced effect. The mid-week price jump provided an attractive entry point as investors rushed to buy in the wake of Greenspan's interest rate reduction. The effect had worn off by the next day though, and even a second rate cut was insufficient to prop up the stock as it continued to decline right through the converged 10-dma, 30-dma, and 200-dma (between $42.81-44.25). The 50-dma ($41) finally provided some support on Friday afternoon, so conservative players will look for selling pressure to overcome the support found both there and at the ascending trendline at $40 before initiating new positions. More aggressive players Trade with the trend and watch for weakness in the SOX.X and NASDAQ before opening new positions. ***January contracts expire in two weeks*** BUY PUT JAN-45 TNN-MI OI=429 at $6.00 SL=4.00 BUY PUT JAN-40*TNN-MH OI=295 at $3.25 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=TQNT *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1315 ************************************************************ ***** LEAPS ***** On Your Mark, Get Set,... By Mark Phillips Contact Support Well ok, maybe not quite yet. But I think we are getting close. The new year is now underway, and one thing is abundantly clear. Changing the calendar is much easier than changing the direction of the markets. Weakness across the board is still the dominant theme, and even two interest rate reductions in one week couldn't put the bulls back in charge. Simple logic makes it clear that things can't change overnight. The economy HAS SLOWED and the speculative dot.com bubble IS history. The primary question on investor's minds now is whether the Fed will be able to keep us out of a recession. Personally, I think Uncle Alan, although a bit sluggish to respond this time around, is still capable of keeping our economy humming along for some time to come. Which brings me to the "good news" part of our little chat. While the economy has slowed, the fact that the Fed is lowering rates means that the central bank feels that growth has moderated a bit too much and are taking steps to bring it back in line. Investors recognize this and will quickly begin to factor an economic upturn into their long term outlook towards the stock market. The recovery in stock prices will lead the actual economic recovery, as we all know that most companies will have an unpleasant quarter or two. But the second half of the year should see economic conditions AND earnings on the upswing again. By the time the growth starts to show up in earnings, smart investors will have already figured it out and reaped some handsome rewards. Look at the Drug sector. When was the time to begin investing here? Over the past month when one analyst after another was making glowing recommendations or back in March when the sector was recovering off of multi-year support levels. The answer is obvious, but hindsight does nothing to increase the cash level in our accounts unless we can apply the lesson going forward. So, is there a sector that we can look at that appears horribly oversold, yet still has profits to drive prices higher? Sure! There are several, among them PC makers, Semiconductors, Telecom providers, and Networkers. How's that for a big list? The question isn't IF they will recover and head higher, but WHEN. As you can tell from our plays this weekend, we think there is hope in the near future for select Semiconductors (TXN) and PC makers (DELL), which is borne out by the emerging strength in both their charts. Of course we need to pay attention to what is happening in the broader markets before committing capital to any individual plays, but things are not all bad there. The VIX has been on a rampage over the past 3 months, topping 30 a total of 38 times since early October. Friday's close at 32.09 makes it clear that volatility is alive and well, while keeping us in the zone that is conducive to purchasing LEAPS for the long haul. If you have done your homework and picked the plays you are interested in purchasing, all you have to do is wait for a dip and bounce in the stock, accompanied by a spike in the VIX and Voila! a ready made entry point is delivered. Ok, well we all know it isn't quite that easy, as the markets have continued to deteriorate over the past 3 months. But the battlefield is significantly different now. The key differences now are that Greenspan is on our side again, and Tax Selling is over. The cash generated by those recent sales, along with a lot of cash already sitting on the sidelines is looking for a place to be put to work. When it starts to flow into equities, we want to have our game plan, and maybe a few positions, already in place. LEAPS are the perfect combination for the medium-term (6-12 month) investor, as they give us time to be right without having to pay full price to own the stock. The little-known bonus is the volatility equation. While a high VIX normally portends a near-term market bottom, the high volatility frequently increases short-term option prices to the point of being ridiculous. Not so with LEAPS. The longer the timeframe, the less susceptible the option is to fluctuations in volatility -- sure it will have an effect, but not enough to make purchases in times of high volatility unattractive. So do some research on your own this week. Look at some of the plays on our playlist. Some of them are compelling values, but not just because they are so far off their highs. Future growth, management, financial stability and business plan are all part of the puzzle. Take a look at the growth prospects for the next several quarters and see if you agree with us that they deserve to be on the playlist. Our playlist is a starting point, not the final shopping list of what to go out and buy. If you can find 2 or 3 plays that are have an attractive valuation, and they start showing signs of life on the daily chart, that sounds to me like the right kind of purchase to kick off what has the potential to be a very profitable year. Choose Wisely, Plan Carefully, and then Execute the Plan. Have a Profitable Week! Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $28.50 200.00% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $14.50 -55.73% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $ 7.13 -35.18% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 7.00 -57.91% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $ 8.50 -43.82% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $ 4.38 -84.07% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 3.40 -81.75% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $ 9.20 -47.43% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $12.63 35.37% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $18.63 246.28% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $12.13 53.93% NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 8.25 -52.17% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $12.13 -31.66% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $12.50 21.24% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $11.13 - 9.14% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $24.13 40.86% JAN-2003 $ 70 OZG-AN $23.13 $32.00 38.35% EXDS 08/06/00 JAN-2002 $ 55 WZZ-AK $20.75 $ 1.63 -92.14% JAN-2003 $ 60 VTQ-AL $25.38 $ 3.13 -87.67% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $24.63 9.47% JAN-2003 $ 70 VLM-AN $29.63 $32.13 8.44% TXN 10/22/00 JAN-2002 $ 50 WTN-AJ $13.75 $12.50 - 9.09% JAN-2003 $ 50 VXT-AJ $18.38 $17.13 - 6.80% ADBE 10/29/00 JAN-2002 $ 80 YEJ-AP $23.50 $ 9.38 -60.09% JAN-2003 $ 80 VAE-AP $30.75 $15.75 -48.78% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $ 8.88 -48.52% JAN-2003 $ 70 VNG-AN $25.00 $15.13 -39.48% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $ 9.63 -26.66% JAN-2003 $ 45 VGY-AI $17.25 $14.50 -15.94% A 12/03/00 JAN-2002 $ 55 YA -AK $16.88 $17.63 4.44% JAN-2003 $ 60 OAE-AL $19.88 $20.50 3.12% ORCL 12/10/00 JAN-2002 $ 35 WOK-AG $ 7.75 $ 7.25 - 6.45% JAN-2003 $ 35 VOR-AG $11.13 $10.88 - 2.25% QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $ 8.50 -43.82% JAN-2003 $ 75 VZQ-AW $19.25 $11.63 -39.58% WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $10.13 5.19% JAN-2003 $ 55 VWT-AK $14.00 $14.75 5.36% Spotlight Play TXN - Texas Instruments $47.31 Like a thoroughbred racehorse, TXN is champing at the bit and is ready to charge up the charts. The $50 resistance level is coming under more frequent attacks, and looks like it could fall for good in the next week or two. After falling better than 50% from its summer highs, positive sentiment in the Wireless equipment industry (TXN is the leading supplier of DSP chips for wireless handsets) is giving the bulls newfound hope in their ongoing quest to wrest control from the bears. The improving fundamental picture, combined with a friendly interest rate environment should help keep our play on the road to recovery, and the next serious obstacle will likely be the $60 resistance level (with the 200-dma sitting at $61.75). Look for a bounce from support near $46 or even $43 to provide for new entry points, but WAIT for the bounce. Given the long timeframe, and the unsettled nature of the technology markets, we currently favor buying a bounce rather than a breakout. This latter approach works best in a consistently trending market, and that has yet to appear, even in solid stocks like TXN. The stock has been leading the broader Semiconductor sector (SOX.X) out of the doldrums due to its lack of a connection with the weakness in the PC industry, and any strength in the SOX should just add to the upward pressure on TXN, providing a great confirming signal for our play. BUY LEAP JAN-2002 $50.00 WTN-AJ at $12.50 BUY LEAP JAN-2003 $50.00 VXT-AJ at $17.13 New Plays DELL - Dell Computer $19.00 Amid the continuous stream of earnings warnings and reports of a slowing economy, it seemed that shares of the PC makers would never reach bottom. The price action over the past few weeks seems to indicate a bottom is in place near $16. The stock hasn't been at these levels for almost 2 years, and it looks like the bad news is already factored into the stock price. While there is no guarantee that PC stocks are set to rally, this seems a good time to start looking for attractive entry points for the recovery that is bound to follow in the months ahead. DELL didn't forget how to make computers, and consumers are still buying them, both here and abroad. Patience will be rewarded on this play, so wait for the entry point to come to you. There is enough volatility left in the Technology market to give us an attractive entry as the stock bounces from the $16-17 level in the weeks ahead. If the unforeseen happens and DELL breaks below the $15 level, stand aside from the play, as it will be a clear indication that there is more pain in store for the bulls. Price gains in other boxmakers like CPQ and GTW will make for a nice confirmation that the PC sector is on the mend. BUY LEAP JAN-2002 $20.00 WDQ-AD at $5.25 BUY LEAP JAN-2003 $25.00 VDL-AE at $5.63 Drops ADBE $51.50 As we feared last week when we put it on probation, ADBE failed to find support at $55, and aside from a brief rally associated with the interest rate reduction, spent the past week trending lower. Software stocks began the new year on a negative note, and ADBE was unable to buck the broader trend, persistently hounded by concerns of slowing growth. Since adding the play in late October, ADBE has been rather disappointing, with only one minor rally to play before the series of technical failures that began with the rollover at the 50-dma in early December. Then the 200-dma fell victim to pre-earnings jitters in early December, and now here we sit more than $12 below that level. While shares of the company could bounce and recover from current levels, we don't see that as the most likely scenario. Rather than continue to chase this play lower, we will drop it and focus on stocks that have clearly bottomed and appear to be showing signs of life. EXDS $17.00 Like so many other unprofitable "new economy" stocks, EXDS has fallen out of favor in recent months, and has been tracing new 52-week lows over the past week. We expected the $20 level to provide support, but the carnage last week shows the fallacy in that thinking. So what did we learn? No matter how low a stock goes, it can always go lower, and ALWAYS use stop losses. The long gradual decline since Labor Day would have taken a nasty bite out of an undisciplined trader's account, but a stop loss order would have stopped the pain early. This leaves your mind free to focus on new, more promising plays, which is precisely what we are going to do now that we have gotten EXDS off the playlist. *********** SPLIT PLAYS *********** The Waiting Game By Matt Russ Over the New Year Holiday, no new splits were announced as investors took time to feel out the market and digest quite an unexpected Fed rate cut. While the market anticipated a rate cut sometime in January, the fact that the Fed cut 50 basis points in the first week of the New Year rather than 25 further into the month caught many by surprise. Nevertheless, it was welcomed and much needed. The rally that ensued was of historical proportions as the NASDAQ had its largest percent gain ever on record breaking volume. A myopic view of the entire event gives an sense of total euphoria. But the fact remains, we have to play the waiting game before this rate cut, and others expected to follow, filter through the economy. Right now, we are currently beginning to feel the effects of the Fed's last rate hike, which was 50 basis points in May. As the economy braces for this and continued corporate worries, the rate cuts may bring temporary euphoria but won't truly bring economic easing until the latter half of 2001. While split announcements will increase in relation with recovery of our current economic condition, there are some less followed stocks outside the tech sector that still are prime candidates. Current Split Run Plays None Current Split Candidate Plays TBL Candidates That Are Not Current Plays AFL CHKP CMVT CAH LTR RKY SWY UHS WLP WWY 10 Most Recent Announcements We Predicted FRX - 12/18 (most recent announcement) BRCD - 11/29 MANU - 11/08 MUSE - 10/25 AMCC - 10/11 DNA - 10/05 LEH - 09/20 ORCL - 09/14 SUNW - 08/17 GLW - 08/16 Major Announcements So Far This Month = 15 HWEN GMCR BOBJ DFXI FSCR HOTT SANM SEIC SCHL AREM GGG EAT FRX DUK STT For our complete stock split calendar, click here... http://members.OptionInvestor.com/splits/index.asp Symbol Company Name Splits Payable Executable SANM - Sanmina Corp. 2:1 01/08/2001 01/09/2001 AREM - AremisSoft 2:1 01/08/2001 01/09/2001 HWEN - Home Financial Bancorp 2:1 01/10/2001 01/11/2001 FRX - Forest Labs 2:1 01/11/2001 01/12/2001 GMCR - Green Mountain Coffee 2:1 01/11/2001 01/12/2001 DFXI - Direct Focus, Inc. 3:2 01/15/2001 01/16/2001 EAT - Brinker International 3:2 01/16/2001 01/17/2001 SCHL - Scholastic Corp. 2:1 01/16/2001 01/17/2001 IDPH - IDEC Pharmaceuticals 3:1 01/17/2001 01/18/2001 AJG - Arthur J. Gallagher & Co. 2:1 01/18/2001 01/19/2001 SWWC - Southwest Water 5:4 01/19/2001 01/22/2001 TALX - TALX Corp. 3:2 01/19/2001 01/22/2001 DUK - Duke Energy 2:1 01/26/2001 01/29/2001 GGG - Graco Inc. 3:2 02/06/2001 02/07/2001 SEIC - SEI Investments 2:1 02/28/2001 03/01/2001 FSCR - Federal Screw Works 5:4 04/02/2001 04/03/2001 STT - State Street Corp. 2:1 05/30/2001 05/31/2001 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1321 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 01-07-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/010701_5.asp ************* COVERED CALLS ************* Volatility and Option Pricing: Q&A with the Covered-calls editor By Mark Wnetrzak Do market-makers use charting to help determine the price of an option? If so, which is more important in determining the value of an option, volatility or the recent trend of the underlying issue? Answer: First, some information about volatility in stocks and options: A stock's volatility, usually referred to as historical volatility, is determined by mathematical formulas that use the issue's recent price activity (closing or high and low values). For example, one of the basic volatility calculations uses past closing prices for a specific stock to determine the annualized standard deviation of the instrument. For example, a historical volatility of 50 means that the stock has a 68% probability (one sigma) of trading within 50% of its average targeted move within one year. An option's volatility usually refers to its implied volatility. This is an estimate or assumption produced by an option pricing model based on factors such as relative strike price, time to expiration, intrinsic value, risk-free interest rate, and the dividend issued with ownership of the underlying stock. Pricing models use a projection of a stock's future volatility in calculating option prices. These formulas do not include an issue's directional trend or price momentum. Thus, if all other factors are the same (stock and strike price, time to expiration, and dividend issued), two different issues that have the same forecast volatility will have similar option prices. It doesn't matter whether one has remained relatively close to a specific price (a trading range) while the other has moved steadily in one direction. That's why it is so important to have a fundamental understanding of technical analysis and basic market trends when selecting an issue; because an option trader can greatly improve his or her success in situations where directional trends are not incorporated into an option's pricing. Question: I have shares in a stock (I'd rather not mention the issue) that has fallen to all-time lows and is nearly worthless. I did not sell the stock when I should have (before December 31st) and now it appears I will have to wait another year to record the loss. Is there anyway I can declare the stock worthless and take the loss on last year's taxes? If you have stock that has become worthless, you can deduct the full cost basis of that position when you do your taxes. The easiest way to close out a position is to sell it, even if you only get a few dollars in the transaction. Of course you don't want to pay more for commissions than you will receive for the issue, so many brokers have an arrangement that allows the sale of worthless stock to them for $1 (or less) for the lot. If you choose not to sell the worthless shares, you must provide documentation to the IRS that the stock really had no value at some point in time, and record the position as "closed" on the same date. If you can demonstrate that the shares did indeed become worthless last year (a letter from your broker or even a note from the company should be sufficient), it is not necessary to sell them at a future date. Another way to unload the stock is to sell it to one of your friends for a minimal amount, and then list the closing price and date on your tax form. The most important thing to be aware of when employing this type of tax loss strategy is the legality of the transaction. At the OIN, we have a number of excellent resources and one of our newest contributors is a tax expert. Jim Crimmins at TradersAccounting.com can help you with all of your questions about taxation with regard to stock and option trading. Contact him at: questions@TradersAccounting.com Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return FIBR 16.06 15.69 JAN 12.50 4.75 *$ 1.19 15.2% MCOM 10.75 10.88 JAN 7.50 3.88 *$ 0.63 10.0% NRGN 35.13 30.25 JAN 30.00 6.75 *$ 1.62 8.3% MCLD 14.69 18.94 JAN 12.50 3.00 *$ 0.81 7.5% CRK 11.44 13.38 JAN 10.00 2.19 *$ 0.75 7.0% GLGC 21.25 17.69 JAN 17.50 5.25 *$ 1.50 6.8% FNSR 27.00 26.25 JAN 22.50 5.75 *$ 1.25 6.4% KLAC 31.81 37.19 JAN 25.00 8.13 *$ 1.32 6.1% EDGW 5.63 6.53 JAN 5.00 1.00 *$ 0.37 5.8% BCGI 28.38 27.94 JAN 22.50 7.25 *$ 1.37 5.6% MATX 17.13 15.19 JAN 15.00 2.69 *$ 0.56 5.6% CHMD 12.13 11.56 JAN 10.00 2.50 *$ 0.37 5.6% PHSY 15.00 15.50 JAN 12.50 2.94 *$ 0.44 5.3% CPRT 18.69 19.50 JAN 17.50 2.19 *$ 1.00 5.3% PHI 17.56 17.25 JAN 15.00 3.25 *$ 0.69 5.2% QTRN 18.38 18.00 JAN 17.50 2.06 *$ 1.18 5.2% HSIC 30.63 30.13 JAN 30.00 2.31 *$ 1.68 5.2% AVID 18.63 18.75 JAN 17.50 2.06 *$ 0.93 4.9% WMS 19.00 18.69 JAN 17.50 2.25 *$ 0.75 4.9% MLHR 26.81 27.75 JAN 25.00 2.88 *$ 1.07 4.9% CVD 11.38 10.56 JAN 10.00 2.00 *$ 0.62 4.8% GETY 32.00 35.72 JAN 25.00 7.75 *$ 0.75 4.5% EXFO 32.00 22.00 JAN 22.50 11.25 $ 1.25 4.4% WMS 19.69 18.69 JAN 17.50 3.00 *$ 0.81 4.2% ARQL 33.75 24.50 JAN 25.00 10.00 $ 0.75 2.3% LEXG 16.63 11.81 JAN 15.00 2.75 $ -2.07 0.0% GZMO 14.19 9.25 JAN 12.50 2.69 $ -2.25 0.0% *$ = Stock price is above the sold striking price. Comments: Nobody said it was going to be easy! Alan's "magic" sure didn't last too long. Genzyme Molecular Oncology (GZMO) continues to trade sideways though a move below the December low would signal an exit. Tuesday's bearish reversal on Lexicon (LEXG) hopefully kept anyone from entering the position - and with the continued overall weakness, we will show the play closed. Mcleodusa (MCLD) endured some radical moves this week and appears to have made a successful test of the November low. Arqule (ARQL) has weakened and a test of the December low now appears likely. Several of the above issues are moving towards key support areas and should be monitored closely. Depending on your outlook, a timely exit may be warranted if the market-wide selling pressure continues. Positions Closed: Miravant (MRVT), Rf Micro Devices (RFMD). NEW PICKS ********* Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ADIC 23.94 JAN 20.00 QXG AD 4.88 403 19.06 14 10.7% SMTC 23.44 JAN 20.00 QTU AD 4.38 321 19.06 14 10.7% APWR 38.88 JAN 35.00 PUW AG 5.25 50 33.63 14 8.9% SUNW 28.00 JAN 22.50 SUQ AX 6.25 20948 21.75 14 7.5% XOXO 22.00 JAN 17.50 QNF AW 5.00 312 17.00 14 6.4% PRIA 23.56 JAN 20.00 UXQ AD 4.00 185 19.56 14 4.9% BBY 39.94 JAN 35.00 BBY AG 5.63 1162 34.31 14 4.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADIC - Advanced Digital Info $23.94 *** Data Storage *** ADIC is a leading device-independent storage solutions provider to the open systems marketplace. The Company offers a broad range of products designed to enhance organizations' ability to store, protect, manage and use their rapidly growing network data. ADIC's automated storage products are available through a worldwide sales force and a global network of resellers and OEMs, including Dell, Fujitsu Siemens and IBM. The explosion in business data is driving companies to seek solutions to traditional storage challenges and ADIC will be filling that need with its new release of its AMASS® for UNIX storage management software. The company reported a strong 4th-quarter in December with 50% growth rates in their core North American markets. We favor the recent move up and out of a seven month Stage I base - which suggests further upside movement. JAN 20.00 QXG AD LB=4.88 OI=403 CB=19.06 DE=14 MR=10.7% /charts/jan01/charts.asp?symbol=ADIC ***** APWR - AstroPower $38.88 *** No Shortage of Solar Power! *** AstroPower is the world's largest independent manufacturer of solar electric power products, and one of the world's fastest growing solar electric power companies. AstroPower develops, manufactures, markets and sells PV solar cells, modules, panels and systems for generating solar electric power. It appears the dip in December was only an opportunity to obtain some cheap AstroPower stock. The stock was recently upgraded and has been added to the S&P SmallCap 600 Index. Friday, Chase H&Q did reduce their fiscal 2001 estimates on the company, but it was due to AstroPower's intensified growth initiatives. The stock rallied strongly off the December dip and it has now moved above its 150 dma (and the December high). A long-term look at a 3-year chart shows that AstroPower's up-trend is still intact. JAN 35.00 PUW AG LB=5.25 OI=50 CB=33.63 DE=14 MR=8.9% /charts/jan01/charts.asp?symbol=APWR ***** BBY - Best Buy $39.94 *** On the Rebound! *** Best Buy is the nation's number one volume specialty retailer of consumer electronics, personal computers, entertainment software and appliances. The company currently operates more than 400 retail locations in 41 states and online at www.BestBuy.com. This week, Best Buy reported sales of $2.69 billion for December which represents a 19% increase over last year. This was good news a day after the FED had reduced the prime rate by 50 basis points. CSFB analyst Gary Balter has reinstated coverage of Best Buy with a "Strong Buy" and a 12-month target price of $60. A reasonable entry point on a rebounding stock for those investors that believe Best Buy has a bullish future. JAN 35.00 BBY AG LB=5.63 OI=1162 CB=34.31 DE=14 MR=4.4% /charts/jan01/charts.asp?symbol=BBY ***** PRIA - PRI Automation $23.56 *** Technicals Only *** PRI Automation supplies factory automation systems for semiconductor manufacturers and OEMs whose mission is to improve the productivity of semiconductor manufacturing. The company offers a broad range of integrated solutions consisting of factory automation hardware and software that optimize the flow of materials and data throughout the semiconductor fabrication facility. PRI also provides automation services including equipment layout and design; simulation; project management; installation; and, on-site support. PRI was halved in September after it warned that it would barely break even because of manufacturing, capacity and supply chain problems. The usual lawsuits have been filed. We simply favor the improving technical signals as the stock forges a Stage I base. Reasonable short-term speculation with a cost basis near support. JAN 20.00 UXQ AD LB=4.00 OI=185 CB=19.56 DE=14 MR=4.9% /charts/jan01/charts.asp?symbol=PRIA ***** SMTC - Semtech $23.44 *** On the Rebound! *** Semtech is a leading supplier of power management, transient protection, system management, high-performance and advanced communications semiconductor products for portable and high-speed communications applications. On Thursday, Semtech announced that it expects to achieve analysts' consensus earnings estimates of $0.23 per share for the 4th-quarter ending January 28, 2001. The company did say their revenue would be sequentially flat this quarter but their gross margin continues to expand. Semtech also announced a $50 million buyback program where common stock and registered convertible subordinated notes may be purchased. Semtech has rallied over the last two weeks on increasing volume, which suggests a change of character is at hand. Reasonable short-term speculation for those who like bottom fishing. JAN 20.00 QTU AD LB=4.38 OI=321 CB=19.06 DE=14 MR=10.7% /charts/jan01/charts.asp?symbol=SMTC ***** SUNW - Sun Microsystems $28.00 *** An Ode to a Fallen General *** Sun Microsystem is a leading worldwide provider of products, services and support solutions for building and maintaining network computing environments. SUNW markets scalable computer systems, high-speed microprocessors, and a complete line of high performance software for operating network computing equipment and storage products. The company also provides a full range of services, including support, education, and professional services. SUNW's products and services command a significant share of the rapidly growing network computing market. We simply wanted to offer a position on one of the old leaders of the Nasdaq with a reasonable cost basis. The technicals suggest the selling pressure is abating though earnings are due the week of expiration. JAN 22.50 SUQ AX LB=6.25 OI=20948 CB=21.75 DE=14 MR=7.5% /charts/jan01/charts.asp?symbol=SUNW ***** XOXO - XO Communications $22.00 *** On The Rebound! *** XO Communications is one of the world's leading providers of broadband communications services offering local/long distance voice communication, DSL access, Web hosting and e-commerce service, Virtual Private Networks, dedicated access, global transit and application infrastructure services for delivering applications over the Internet or a VPN. Friday, XO reported that it had privately sold $450 million of 5.75% convertible subordinated notes maturing in 2009 to help finance the expansion of existing networks and services, develop and acquire additional networks and services, and fund operating losses and working capital. The telecommunication service providers have shown recent strength as investors look for inexpensive stocks with long-term growth potential. XO is on the verge of completing a "double-bottom" formation and the heavy volume supporting the current rally suggests further upside potential. We simply favor the change of character and increasing strength in the face of general market weakness. JAN 17.50 QNF AW LB=5.00 OI=312 CB=17.00 DE=14 MR=6.4% /charts/jan01/charts.asp?symbol=XOXO ***** ***************** SUPPLEMENTAL COVERED CALLS ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ABIZ 5.94 JAN 5.00 QPI AA 1.19 143 4.75 14 11.4% AEOS 46.44 JAN 45.00 AQU AI 3.50 320 42.94 14 10.4% DAL 52.75 JAN 52.50 DAL AX 2.00 217 50.75 14 7.5% AVCI 21.31 JAN 15.00 QYV AC 6.75 36 14.56 14 6.6% PRGN 20.94 JAN 17.50 GQP AT 3.88 303 17.06 14 5.6% AL 35.38 JAN 35.00 AL AG 1.25 1086 34.13 14 5.5% ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1295 ************************************************************** *********************** CONSERVATIVE NAKED PUTS *********************** Success Basics: Portfolio Diversification Revisited... By Ray Cummins One of our readers asked why we promote the use of portfolio diversification as a key trading rule for new investors. First, it's important to define the term diversification with regard to stocks and investments. In this case, diversification is a risk management technique that combines a variety of trading positions within a portfolio, thus reducing the impact of any one investment on its overall performance. An astute investor knows that negative news concerning a well-known company in any sector will tend to affect all of the stocks in that particular group. That is one reason it is important to balance the holdings in your portfolio; so that they don't all decrease in value because of a single event. Diversification also lets you take advantage of the variety of financial instruments available in the market, and an assortment of issues from different categories will ensure that at least some of your investments are outperforming the major indices. Blue Chip stocks are historically the best long-term investments. These companies are established, high quality issues like Dupont (DD), Boeing (BA), McDonalds (MCD, American Express (AXP), and International Business Machines (IBM). They generally pay good dividends and are considered the bellwethers of the stock market. Defensive or safety issues are stocks that remain stable even in declining markets. This group usually includes utilities, drug manufacturers, and consumer products or food companies. These stocks hold their value in recessions because their products are always in demand, regardless of the economic climate. Cyclical companies are those whose earnings fluctuate with changes in a particular business or industry cycle. When the conditions are favorable, the company's stock and earnings rise. As the cycle ends, the company's revenues and stock value falls back to its previous position. Growth stocks include any companies that have a high probability of capital appreciation. They retain most of their earnings and usually don't pay dividends. In most cases, all of their income is invested in the company for expansion and acquisition or research. These stocks are more speculative and are generally found in the technology segment. One other type of investment; Income stocks are very conservative issues that have yields comparable with corporate bonds. These companies can offer competitive returns because their products or services are superior to others in the industry and they also have the possibility of price appreciation. Another popular category of stocks is the Conglomerate. These companies have a diverse line of products and services that span a number of key industries. For example Minnesota Mining and Manufacturing (MMM) is often referred to as maker of industrial adhesive products (3M markets Scotch brand tape) but they also provide manufacturing services for the transportation, graphics and safety, health care, consumer, office supply, electronics, communications and specialty materials industries. Each specific segment is affected by a combination of many different elements, including the overall economy, the health of the industry they do business in, and the unit's individual performance. All of these subsidiaries behave in different ways from one another, performing uniquely in separate cycles and with varying degrees of success. At any given time, one or more of these segments will outperform the broader market and by owning shares of a conglomerate, you can benefit from their ability to compensate for common economic fluctuations. It's obvious that businesses in different industries are affected in unique ways by the same economic variables and this reasoning applies just as well to a large portfolio of positions. Fund managers are an excellent example of this concept; they invest in a variety of issues to protect their portfolio against unexpected changes in the market. The amount of risk you are willing to incur has a direct effect on the diversity in your portfolio. Because every financial instrument reacts differently to market conditions and other business and economic factors, experienced traders attempt to maintain a balanced group of positions that provide steady income and a reasonable potential for capital appreciation. Though you are less likely to become an overnight millionaire with this low risk approach, your investment capital will be protected from unexpected losses, and your portfolio will be able to increase in value on a consistent basis. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return PHI 17.81 17.25 JAN 15.00 0.50 *$ 0.50 15.1% KLAC 33.69 37.19 JAN 25.00 0.75 *$ 0.75 14.5% PLNR 28.88 24.13 JAN 22.50 0.63 *$ 0.63 10.7% CNF 33.81 34.81 JAN 30.00 0.69 *$ 0.69 9.6% CHTR 22.00 22.13 JAN 20.00 0.81 *$ 0.81 9.3% BSTE 37.50 33.00 JAN 25.00 0.69 *$ 0.69 9.2% STAT 26.44 22.69 JAN 22.50 0.44 *$ 0.44 9.0% NEM 16.25 16.88 JAN 15.00 0.88 *$ 0.88 8.9% ALSI 33.63 29.75 JAN 25.00 0.44 *$ 0.44 8.9% AEIS 24.38 23.50 JAN 20.00 0.69 *$ 0.69 8.2% ADVP 39.50 36.53 JAN 30.00 0.81 *$ 0.81 8.1% HCR 19.69 18.13 JAN 17.50 0.44 *$ 0.44 7.8% MU 35.88 36.50 JAN 25.00 0.69 *$ 0.69 7.6% ADLAC 48.56 48.44 JAN 35.00 0.69 *$ 0.69 7.2% CPRT 20.25 19.50 JAN 17.50 0.38 *$ 0.38 7.2% LFG 38.38 38.56 JAN 35.00 1.00 *$ 1.00 6.7% PPDI 48.19 41.94 JAN 40.00 0.69 *$ 0.69 6.4% PHCC 40.81 32.38 JAN 32.50 0.50 $ 0.38 6.4% SPF 25.44 24.25 JAN 22.50 0.69 *$ 0.69 6.3% TXN 47.63 47.31 JAN 32.50 0.56 *$ 0.56 6.0% BSTE 36.94 33.00 JAN 22.50 0.50 *$ 0.50 5.5% NKE 51.19 54.88 JAN 45.00 0.75 *$ 0.75 5.4% TXCC 47.88 31.50 JAN 25.00 0.75 *$ 0.75 5.3% KLAC 35.94 37.19 JAN 22.50 0.56 *$ 0.56 5.2% SNPS 42.13 48.00 JAN 35.00 0.88 *$ 0.88 5.2% BCHE 28.38 31.75 JAN 25.00 0.50 *$ 0.50 5.1% CCR 41.69 48.31 JAN 35.00 0.75 *$ 0.75 5.1% FNSR 37.50 26.25 JAN 22.50 0.56 *$ 0.56 5.0% ADLAC 40.81 48.44 JAN 30.00 0.50 *$ 0.50 5.0% OXY 22.56 24.06 JAN 20.00 0.56 *$ 0.56 4.9% INSUA 39.88 34.94 JAN 35.00 0.44 $ 0.38 4.8% *$ = Stock price is above the sold striking price. Comments: Keep an eye on Pharmaceutical Products (PPDI) as it has moved down rather quickly. Friday's decline in Insituform (INSUA) is quite bearish - exiting the position may be wise. Transwitch (TXCC) is moving towards a test of the November low - a key moment. Tuesday's opening on Priority Healthcare (PHCC) either kept you out of the position or allowed for a lower cost basis. The era of quick and easy remedies in this market is past, thus concentrating on money management becomes a high priority. Positions Closed: Cor Therapeutics (CORR) NEW PICKS ********* Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CLPA 6.25 JAN 5.00 QJC MA 0.25 244 4.75 14 36.2% CAL 56.50 JAN 50.00 CAL MJ 0.63 290 49.37 14 8.2% HD 49.75 JAN 45.00 HD MI 0.56 10006 44.44 14 7.7% AMR 43.75 JAN 40.00 AMR MH 0.50 47 39.50 14 7.6% C 53.69 JAN 50.00 C MJ 0.56 11897 49.44 14 6.6% COST 41.31 JAN 37.50 PRQ MU 0.38 135 37.12 14 6.3% GM 54.00 JAN 50.00 GM MJ 0.50 10602 49.50 14 6.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. One of our long-time subscribers asked why we don't offer more blue-chip issues in this section. With the recent indecision in the market, it seems like a good time to honor that request. ***** AMR - American Airlines Holdings $43.75 *** Hot Sector! *** AMR Corporation is the holding company of American Airlines. American is one of the largest scheduled passenger airlines in the world, providing scheduled jet service to more than 170 destinations throughout North America, the Caribbean, Latin America, Europe and the Pacific. American also is one of the largest scheduled airfreight carriers in the world, providing a range of freight and mail services throughout its system. AMR owns three smaller airlines that operate as American Eagle Airlines, Executive Airlines and Business Express Airlines. American Airlines reported its system-wide traffic increased 4% in 2000, with international traffic up 6.8% and domestic traffic up 2.8%. AMR flew almost 2.3 billion cargo ton-miles, up 10.1% year over year. The data suggests that American is performing well and if you need a blue-chip transport issue in your portfolio, this is a good candidate. JAN 40.00 AMR MH LB=0.50 OI=47 CB=39.50 DE=14 MR=7.6% /charts/jan01/charts.asp?symbol=AMR ***** C - Citibank $53.69 *** Credit Scare! *** Citigroup is a diversified holding company whose businesses provide a broad range of financial services to consumer and corporate customers in 101 countries and territories. The company's activities are conducted through Global Consumer, Global Corporate and Investment Bank, Investment Management and Private Banking, and Investment Activities. Financial stocks retreated Friday, following two days of advances that came amid euphoria about the FOMC's recent interest rate cut. However, rumors about bad loans and major losses by Bank of America (BAC) pressured the group, even though the company denied the news of potential losses in derivatives or other trading activities. For traders who want to own a top-tier financial stock, Friday's sell-off may offer a perfect entry opportunity. JAN 50.00 C MJ LB=0.56 OI=11897 CB=49.44 DE=14 MR=6.6% /charts/jan01/charts.asp?symbol=C ***** CAL - Continental Airlines $56.50 *** Buying It Back! *** Continental Airlines is a United States air carrier engaged in the business of transporting passengers, cargo and mail. The company serves over 200 airports worldwide and has connecting service through alliances with domestic and foreign carriers. Continental Airlines expects to close a deal to regain control of the carrier from rival Northwest Airlines on January 22 and the company is calling the event "Independence Day," as it is the first time in two decades that a major stockholder has not controlled Continental Airlines. In 1998, Northwest Airlines (NWAC) bought a controlling stake in Continental and now they have agreed to sell most of it back to Continental. Northwest will remain a minority shareholder, but investors like the idea that Continental is in charge of its own destiny and the chart reflects that attitude. JAN 50.00 CAL MJ LB=0.63 OI=290 CB=49.37 DE=14 MR=8.2% /charts/jan01/charts.asp?symbol=CAL ***** COST - Costco Wholesale $41.31 *** Technicals Only! *** Costco Wholesale operates membership warehouses based on the concept that offering members very low prices on a limited selection of nationally branded and selected private label products in a range of merchandise categories will produce high sales volumes and rapid inventory turnover. This rapid inventory turnover, when combined with the efficient operation achieved by volume purchasing and effective distribution along with reduced handling of merchandise in self-service facility, enables Costco to operate profitably at significantly lower gross margins than traditional wholesalers, discount retailers and supermarkets. Costco's recent technical breakout has been the subject of discussion on many charting web-sites and this pullback may offer a great entry opportunity for traders who are bullish on the issue. Target a higher premium initially in the position. JAN 37.50 PRQ MU LB=0.38 OI=135 CB=37.12 DE=14 MR=6.3% /charts/jan01/charts.asp?symbol=COST ***** GM - General Motors $54.00 *** Entry Point? *** General Motors has the following businesses: Automotive, Communications Services and Other Operations, which consists of the design, manufacturing and marketing of cars, trucks, locomotives and heavy duty transmissions and related parts and accessories, as well as the operations of Hughes Electronics Corporation; and Financing and Insurance Operations, which consists primarily of General Motors Acceptance Corporation, which provides a broad range of financial services. Analysts say that General Motors is an excellent prognostic tool for blue-chip stocks and the adage is, "As GM goes, so goes the Dow." If you think the Fed can get the economy (and the stock market) moving in the coming months, GM might be a good issue to have in your portfolio. JAN 50.00 GM MJ LB=0.50 OI=10602 CB=49.50 DE=14 MR=6.0% /charts/jan01/charts.asp?symbol=GM ***** HD - The Home Depot $49.75 *** Retail Giant! *** The Home Depot is the world's largest home improvement retailer and the third largest retailer in the United States. The company has over 1100 stores in 47 states, six Canadian provinces, Puerto Rico, Chile and Argentina. They sell an assortment of building materials and home improvement and lawn and garden products. The company also offers similar products through subsidiaries such as Maintenance Warehouse and National Blinds & Wallpaper, and EXPO Design Center stores. Additionally, they operate two Villager's Hardware test stores, which offer products for home enhancement and small projects. Portfolio managers are cautiously optimistic that Home Depot's long-term outlook and growth plans will outweigh current challenges. Eric Morrison of the Wilmington Large Cap Growth Institutional fund is one such manager, having invested 2.5% of his fund in Home Depot - one of the fund's top-10 stock picks. The company is expected to deliver 23% to 25% earnings growth in 2001 but the question is, can they do this in a slowing economic environment? JAN 45.00 HD MI LB=0.56 OI=10006 CB=44.44 DE=14 MR=7.7% /charts/jan01/charts.asp?symbol=HD ***** Speculation Play ***** CLPA - Cell Pathways $6.25 *** Cheap Speculation! *** Cell Pathways Holdings is a pharmaceutical company focused on the research, development and commercialization of products to prevent cancer and to treat cancer. Their technology is based upon CLPA's discovery of a novel mechanism that it believes can be targeted to induce selective apoptosis, or programmed cell death, in certain pre-cancerous and cancerous cells without affecting normal cells. CLPA has created a class of selective apoptotic anti-neoplastic drugs (SAANDs) and has synthesized over 500 new chemical compounds in this unique group. In screening assays, over 200 of these drugs display significantly greater apoptotic potency than CLPA's lead drug product, Aptosyn. CLPA was hammered last September as the FDA decided it would need further information before approving the company's NDA on Aptosysn. Now the issue is recovering from the selling pressure and recent product developments will likely be reported in the coming months. A cost basis near $5 seems like a reasonable price for this speculative issue. JAN 5.00 QJC MA LB=0.25 OI=244 CB=4.75 DE=14 MR=36.2% /charts/jan01/charts.asp?symbol=CLPA ***** ***************** SUPPLEMENTAL NAKED PUTS ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return SUNW 28.00 JAN 20.00 SUQ MD 0.44 18230 19.56 14 15.8% PSUN 28.25 JAN 25.00 PVQ ME 0.56 15 24.44 14 14.1% LIZ 42.31 JAN 40.00 LIZ MH 0.69 2668 39.31 14 9.8% AEOS 46.44 JAN 40.00 AQU MH 0.50 175 39.50 14 8.6% DAL 52.75 JAN 50.00 DAL MJ 0.75 1367 49.25 14 8.5% ASD 52.94 JAN 50.00 ASD MJ 0.50 325 49.50 14 5.8% *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1316 ************************************************************ ************************ SPREADS/STRADDLES/COMBOS ************************ The Sell-off Continues... Friday, January 5 Stocks retreated today amid renewed concerns over earnings and the sluggish outlook for the economy. The Nasdaq finished down 159 points at 2,407. In addition, rumors of credit problems at one of the nation's leading banks helped send the Dow average 250 points lower to 10,662. The S&P 500 index slid 34 points to 1298. Trading volume on the NYSE reached 1.4 billion shares, with declines beating advances 1,705 to 1,252. Activity on the Nasdaq was heavy at 2.1 billion shares exchanged, with declines outpacing advances 2,442 to 1,412. In the bond market, the U.S. 30-year Treasury rose 23/32, pushing its yield down to 5.39%. Thursday's new plays (positions/opening prices/strategy): BEA Systems BEAS JAN85C/JAN40P $2.06 credit strangle Broadcom BRCM JAN160C/JAN55P $1.75 credit strangle Emulex EMLX JAN105C/JAN50P $1.75 credit strangle Today's volatile activity did little to help the premiums in our new positions unless, of course, you were "legging-in" to each side of the play. The only position that traded near our target credit (on a simultaneous order basis) was BEA Systems. However, Emulex and Broadcom did offer favorable premiums for traders who don't mind owning the issues at (currently) discounted prices. Portfolio Plays: The stock market took a turn for the worse today, giving back almost all of last week's gains as earnings warnings continued to pour in from a number of popular issues. Analysts did little to help the situation, downgrading a slew of bellwether stocks in the midst of the broad market sell-off. On the Dow, 3M (MMM) was a big loser, falling over $4 to $114 after Lehman Brothers (LEH) lowered its 2001 earnings estimates. Hewlett-Packard (HWP) was also in a downdraft, falling $4 to $30 after UBS Warburg and Goldman Sachs cut their 2001 earnings estimates on the company. The well-known broker also reduced its estimates on International Business Machines (IBM), while UBS sliced profit expectations on Dell Computer (DELL). Financial issues also slumped as traders learned of the banking industry's exposure to utility companies in California. Rumors circulated on the trading floor that Bank of America (BAC) is facing loan losses from bankrupt utilities companies. Bank of America announced last month that it would not meet fourth-quarter earnings estimates due to $1.2 billion in bad loans and low fees from trading and investment banking. Among technology shares, Internet, semiconductor, hardware and wireless telecom stocks generally moved lower. In the broader market, biotechnology and retail stocks slumped while a select number of healthcare, pharmaceutical and oil service issues posted gains amid a flight to safety. There was little positive activity in the Spreads/Combos section today, and the few plays that benefited from the bearish activity were already near maximum profit. The most exciting portfolio news affected a position in that category; the CV Therapeutics (CVTX) bear-call spread. CVTX lost over 30% of its value after the company announced it would have to test its primary drug in development, Ranolazine, on many more patients to prove that it works. CV officials said they conducted an initial analysis of one of two main clinical trials, but concluded the trial wasn't large enough to prove that the drug works. Earlier trials of the drug were positive but additional tests could set back the drug development program by six months or more. While we don't like to profit from anyone's loss, it was nice to see some favorable activity among all the negative news. One of the few bullish movers was Central Garden and Pet Supplies (CENT), up $1.06 to $8.69. The rally was just in time as we were planning to close the long-term calendar spread for a small loss. Now the problem is whether to remain in the neutral position or simply hold the MAR-10 calls for further upside potential. Next week's test of a recent resistance area near $9.20 should provide some guidance in the play. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these issues. Review each play individually and make your own decision about the future outcome of the position. ****************************************************************** BSX - Boston Scientific $15.56 *** On The Move! *** Boston Scientific is a worldwide developer, manufacturer and marketer of minimally invasive medical devices. The company's products are used in a broad range of interventional medical specialties; cardiology, electrophysiology, gastroenterology, neuro-endovascular therapy, pulmonary medicine, radiology, urology and vascular surgery. BSX's products are generally inserted into the human body through natural openings or small incisions in the skin and can be guided to most areas of the anatomy to diagnose and treat a wide range of medical problems. These products provide effective alternatives to traditional surgery by reducing procedural trauma, complexity, risk to the patient, cost, and recovery time. Boston Scientific has been "on the move" in recent sessions amid speculation of a potential merger/buyout of the company. The most prevalent rumors suggest that Medtronic (MDT) is the primary suitor, but there is no public news to substantiate that opinion. Regardless of the reason, BSX has moved out of a Stage I basing pattern on heavy volume and the potential for additional upside activity is excellent. Based on the increased activity in the stock and underlying options, there are a number of positions that offer favorable risk/reward potential. We prefer a limited risk/high return diagonal spread. PLAY (speculative - bullish/diagonal spread): BUY CALL FEB-15.00 BSX-BC OI=3401 A=$2.19 SELL CALL JAN-17.50 BSX-AW OI=5452 B=$0.43 INITIAL NET DEBIT TARGET=$1.62 INITIAL TARGET ROI(max)=50% /charts/jan01/charts.asp?symbol=BSX ****************************************************************** AGN - Allergan $83.19 *** Failed Rally? *** Allergan is a provider of eye care and specialty pharmaceutical products throughout the world with products in the eye care pharmaceutical, ophthalmic surgical device, over-the-counter contact lens care, movement disorder, and dermatological markets. Allergan's worldwide-consolidated revenues are generated mostly by prescription and non-prescription pharmaceutical products in the areas of ophthalmology and skin care techniques, neurotoxins, intraocular lenses and other ophthalmic surgical products, and contact lens care products. The recent move by the Fed to cut interest rates has bolstered optimism for the stock market, but investors are torn between the idea of building a defensive portfolio and speculating on oversold technology issues. Analysts say a forward-looking strategy is to buy into high-tech companies whose prices have retreated from last year's sky-high levels and have a proven record of profit growth. Non-cyclical stocks like drugs, food and other essential household products (that people purchase regardless of how the economy is faring) have performed well over the past few months but their strength is waning. No one knows which sectors will move higher in the coming months, but based on technical indications, a short-term consolidation is appropriate for stocks in the Drug Manufacturers segment. Note: Target a higher premium initially in the position, to allow for a rebound from Friday's big sell-off. PLAY (conservative - bearish/credit spread): BUY CALL JAN-100 AGN-AT OI=2292 A=$0.38 SELL CALL JAN-95 AGN-AS OI=466 B=$0.81 INITIAL NET CREDIT TARGET=$0.62-$0.75 ROI(max)=14% This position was discovered with one of our primary scan/sort techniques; identifying potentially failed rallies on issues with bullish options activity. In this case, the premiums for the (OTM) call options are slightly inflated and the potential for a successful (technical) recovery is significantly affected by the resistance at the sold strike price; a perfect condition for a bearish credit spread. /charts/jan01/charts.asp?symbol=AGN ****************************************************************** OCA - Orthodontic Centers of America $26.68 *** Big Premium! *** Orthodontic Centers of America provides practice management services to orthodontic practices in the United States. The company develops orthodontic centers and manages the business operations and marketing aspects of orthodontic practices, which allows orthodontists who are affiliated with OCA to focus on delivering patient care. OCA manages over 500 orthodontic centers located in the U.S., Puerto Rico, Japan and Mexico. The company has also developed almost 300 orthodontic centers, acquired the assets of and formed affiliations with over 300 orthodontic practices, and consolidated a number of orthodontic centers. The company is not in the business of orthodontics but in the business of managing its orthodontic centers, as well as developing and implementing marketing plans for the orthodontic centers, utilizing television, radio and print advertising and internal marketing promotions. We like this issue for a premium-selling position because it has a relatively well-defined trading range and no apparent news or events that will substantially change its character prior to the January options expiration. The company's earnings announcement is not expected until late in the month and our cost basis is near the most recent trading range at $23-$25. Our plan is to sell OTM options for credit and use the earned income to offset any losses on the downside. If the price of the stock continues to move through the support area near $25 in the coming week, we will close the play at a small loss or sell (short) the stock to cover our sold options. Traders with a bullish outlook for the issue in the long-term could also sell additional calls against the stock, in the event it is eventually assigned. PLAY (conservative - neutral/credit strangle): SELL CALL OCT-35 OCA-AG OI=330 B=$0.43 SELL PUT OCT-25 OCA-ME OI=20 B=$1.12 INITIAL NET CREDIT TARGET=$1.56-$1.62 ROI(max)=20% UPSIDE B/E=$36.56 DOWNSIDE B/E=$23.43 /charts/jan01/charts.asp?symbol=OCA ****************************************************************** - STRADDLES - These positions meet our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and potentially high reward. As with any recommendations, they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** LYO - Lyondell Chemical $16.56 *** Probability Play! *** Lyondell Chemical Company manufactures and markets a variety of intermediate and performance chemicals, including propylene oxide, polyether polyols, propylene glycol, propylene glycol ethers, butanediol, toluene diisocyanate, styrene monomer, and tertiary butyl alcohol and its derivative, methyl tertiary butyl ether, which are collectively known as the company's chemicals and derivatives business. Lyondell also owns 58% of LYONDELL-CITGO Refining LP, which produces refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants. The recent rally in LYO shares received a boost in late December when Goldman Sachs analyst Avi Nash upgraded the Basic Chemicals group and more specifically, Lyondell to Market "Outperformer." Now the stock is enjoying strong upside momentum with little overhead supply to impede its climb until $18-$20. LYO options are at historically low prices and the issue has demonstrated more than enough movement to make this position profitable in the required time period. In addition, the company's earnings are due in late-January. PLAY (conservative - neutral/debit strangle): BUY CALL MAR-17.50 LYO-CW OI=64 A=$0.88 BUY PUT MAR-15.00 LYO-OC OI=193 A=$0.81 INITIAL NET DEBIT TARGET=$1.50 TARGET ROI=25% /charts/jan01/charts.asp?symbol=LYO ****************************************************************** MIPS - Mips Technologies $26.38 *** Earnings Play! *** MIPS Technologies is a leading designer of high-performance and low power consumption processors, cores and related intellectual property for use in a wide variety of increasingly sophisticated consumer devices and networking equipment. The company's unique, industry standard designs are based on its 32 and 64-bit reduced instruction set computing (RISC) architectures. MIPS licenses its designs and related intellectual property to semiconductor companies and system original equipment manufacturers. Together with its licensees, the company offers a broad variety of high performance processors in standard, custom, semi-custom and application-specific products. MIPS has over thirty licensees and the company's licensees offer over 60 standard processors based on RISC architecture, which have a cumulative installed base of about 160 million units. There has recently been a lot of option activity in stocks that are about to report earnings and one strategy that can work well in this scenario is to buy a short-term straddle (both a put and a call with the same strike price and expiration date). This conservative technique can take advantage of a surprise move in either direction, and can profit when the stock moves ahead of the company's earnings, in expectation of a particular outcome. There are pitfalls to this strategy because occasionally there is more hype than substance in the option premiums preceding an earnings announcement. The basic requirements for success are inexpensive options on an issue that has (proven) historical volatility. In addition, the strategy is perfect for the novice trader providing he or she understands option pricing basics and follows a few simple guidelines. For these reasons, straddle buying continues to be a preferred option trading technique when positions are established based on sound statistical analysis. MIPS Technologies will report its 2001 second quarter earnings and conduct its conference call on Thursday, January 11, 2001. PLAY (speculative - neutral/debit straddle): BUY CALL JAN-25 MUP-AE OI=73 A=$2.68 BUY PUT JAN-25 MUP-ME OI=259 A=$1.31 INITIAL NET DEBIT TARGET=$3.75 TARGET ROI=15% /charts/jan01/charts.asp?symbol=MIPS ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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